What role do interim valuations play in LP due diligence and what are the limitations to unrealised marks?
“We evaluate interim valuations of predecessor funds when assessing a manager as part of our standard due diligence process, although it is fair to say that we place greater weight on fully realised deals.”
Michael Barzyk
“On balance, we lean more towards distributions to paid-in capital (DPI), because we are aware that valuations may be inflated, particularly before fundraising. When relying on interim valuations, however, it is important to recognise that some GPs are more prone to undervaluing assets, while others are more aggressive. That can clearly be seen when two or three GPs share the same deal but hold the asset at widely different marks.”
Jessica Sellam
“We look closely at all valuations, but we make a major distinction between realised and unrealised performance. It is important to have a healthy degree of scepticism about unrealised marks, because they are controlled by the manager to an extent.” We particularly like to focus on cash returned, because in an environment such as today’s, no exit is guaranteed. There may be a market consensus that a business is worth US$1bn, but until you sell it, that cannot be proved.”
John Haggerty
“Understanding interim valuations, and whether they are over- or under-marked, is important because investors ultimately want to figure out whether a fund is performing or not. Performance persistence means that if a fund is doing well, then its successor is also likely to do well, and so this is a vital component of LP due diligence.”
Steven Kaplan