A frank conversation about private market valuations with Mitesh Pabari, Hamilton Lane
At SuperInvestor 2023, Mitesh Pabari, Principal of Fund Investments, Hamilton Lane, took the stage to decode the current state of valuations. Mitesh is a Principal on the Fund Investment team based in the London office, where he is responsible for all aspects of fund due diligence. Read on as Mitesh unlocks 4 compelling reasons why private valuations have held up despite market volatility, and scroll down to watch his exclusive interview!
Conversations calling private market valuations unrealistic, or perhaps worse, was commonplace in 2022, when every meeting sought to address the elephant in the room: how could public markets be down 20% and private markets only down around 5%?
We’ll start with the punchline: according to Hamilton Lane data from our 2023 Market Overview, in fact, we believe valuations are pretty accurate across most private market sectors.
In sum, private markets started off 2022 generally priced at a discount to their public sector equivalents; private markets also had more exposure, relatively speaking, to better performing sectors; private companies held in private market portfolios had, on average, stronger operational performance than did their public market equivalents; and to cap it all, prices at exit show that GPs on the whole do value their portfolio companies in a conservative fashion.
Firstly, at the outset of 2022, private equity was less expensive compared to public markets, so it’s not a big surprise private valuations didn’t perfectly mirror the declines on the public side: private markets were already valued in a conservative fashion compared to public markets, and there was room for public equity valuations to fall without the same decline for private equity. With the exception of a few sectors, valuation multiples for public equities and private equities converged over the course of 2022.
Source: Hamilton Lane Data, Bloomberg (September 2023)
Second, while to some it felt like the sky was falling in 2022, it is important to bear in mind that not everything fell in value. About 15% of the component companies of the MSCI World Index were up more than 10% in 2022. Selection certainly mattered, and sectors mattered a great deal. Better-performing sectors had greater weightings generally in private portfolios while poorer-performing sectors had smaller weightings.
Source: Hamilton Lane Data, Bloomberg (December 2022)
A third reason that private valuations held up was because private companies notched up better operational performance than public counterparts. As the table above shows, in 2022, private companies subject to buyout deals outperformed companies on the MSCI World Index when it came to revenue growth and EBITDA growth. So all else held equal, we believe these private companies would not suffer to the same extent as their public counterparts due to stronger and more resilient fundamentals.
Our final data-backed reason that valuations in private markets held up last year is the average price at which GPs exited deals. Looking at deals exited over the two years to Q1 2023, the value of a company was on average 20.5% higher at exit compared with its value four quarters prior and 1.5% two quarters prior to exit. Valuations as a whole appear to be in line with the returns you would expect a year prior to exit.
So we can see that exits have historically tended to occur at prices higher than valuations. Furthermore, this is not just true when public markets are strong, but was also true in the bearish year 2022. So valuations aren’t disassociated from reality.
Watch this exclusive interview from SuperInvestor 2023 with Mitesh Pabari, as he unravels volatility in public markets, resilience of private markets, 4 compelling reasons behind the steadfast nature of private markets, shares tips on maintaining robust LP/GP relationships amidst uncertainty, and provides a glimpse into what the future holds for the world of investments!
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