Are LPs incorporating into their thinking the idea that it is important to monitor the historical movement of marks?
“Reporting net asset value (NAV) is a strategic and not an accounting decision on the part of GPs. Steven and I worked together on another paper some time ago that explored the ways in which GPs manipulate NAV during fundraising. The research found that poorly performing funds exaggerate performance, while highly performing funds understate performance. I think the idea that looking at the history of NAVs can teach you something about the GP and what current valuations mean is intuitive, given those earlier findings.
“That is particularly true when it comes to the findings about stale valuations. It is always easier to justify not changing a mark than it is changing one. That feels like a relatively easy way for GPs to manipulate reported NAVs.”
Gregory Brown
“We typically look at the full valuation history of portfolio companies. Specifically, we look at the multiple uplift that a deal experiences at the time of exit compared with where it was marked three quarters earlier. Generally, what we see is a statistically significant uplift, often in the range of a quarter to three quarters of a turn.
“The findings of this paper were extremely interesting – analogous to a momentum factor in PE portfolio companies. We will certainly try to apply similar analytics around the staleness of marks and the trajectory of future marks in our underwriting going forward.”
Michael Barzyk