Bain's 2023 Global Private Equity report suggests that the expected mark-downs in private equity portfolios may, after all, not take place.
After the downturn in public market valuations in 2022, the consensus was that it was only a matter of time before PE portfolios followed suit. Clearly, PE portfolio valuations are driven by public equity multiples and credit spreads, among other market data points.
However, according to Bain, the other shoe may not drop after all. While the S&P 500 closed 2022 down 19%, PE valuations for the largest managers did not match the downturn in public equities. In fact, Apollo and Blackstone posted gains over the year.
Although market participants consider 4th quarter valuations to be more vulnerable given year-end audits, data from Burgiss, a private capital data and analytics provider, suggests that year-end valuation adjustments have historically not been dramatic. Close to 60% of the time over the past decade, the fourth quarter adjustment has been less than 10% one way or another. Change greater than 20% occurs only 21% of the time.
More importantly, Bain presents data suggesting that PE funds' valuations have historically been conservative. As shown below, PE funds have exited assets at valuations exceeding their last quarterly mark nearly 70% of the time.
Given the breadth and scope of private equity as an asset class, it could be argued that the S&P 500 is a poor proxy for broad-based valuations. For example, more than two thirds of the 2022 decline in the S&P 500 was attributable to massive declines in tech stocks, most notably Microsoft, Alphabet, Amazon and Meta.
This is not to say that we'll see a resumption of post-Covid fundraising and deal activity, particularly given continued macro uncertainties and a higher interest rate environment. However, it appears that the long-term outlook for private equity is very bright.
