A new PitchBook survey revealed some lingering mistrust between LPs and their private market managers.
Sixty-six percent of LP respondents said they believe their VC portfolios are overvalued, and 36% said the same about their PE investments. The skepticism is, in part, a hangover from 2021’s sky-high private market valuations and the low interest rate environment in the US, but it also highlights a fundamental difference in the way PE and VC managers value their investments.
In PE, the valuation process involves a rigorous series of in-house and external valuations through various methods that I wrote about last year, when the question of overvaluation was fresh on everyone’s minds. There’s a market approach, which compares PE portfolio companies to publicly traded firms; the discounted cashflow method, which uses information specific to the company being valued; and a precedent transaction analysis.
Whether the fair value of the asset is determined in-house or through a valuation service, it sees a series of reviews, from the analysts to the managing directors to the board of directors. Then, it goes to the auditors.
“And I can tell you, [the auditors] go over it with a fine-tooth comb, asking ‘why did you pick this? Why did you do this? Do that?,’” Ron Kahn, co-head of Lincoln International‘s portfolio valuation group, told me.
In venture capital, the process looks different. Managers typically value a portfolio company based on the price of the last financing round. Because activity has been slow across the private markets since 2022, the time between rounds has increased, leaving LPs without recent valuation references.
VC managers don’t leave their LPs in the dark, employing other techniques using publicly traded comparables, for example, but allocators can still find it difficult to get accurate insight.
This dynamic could be playing out in the way that LPs are spending their money. At the end of 2023, PE fundraising fell 1.1% while VC capital gathering fell 47.3% year-over-year, according to PitchBook data.
Featured image by Drew Sanders/PitchBook News
Learn about our editorial standards.
