David is a managing director in the Alternative Asset Advisory practice, based in Seattle, Washington. He has more than 37 years of transaction and accounting experience. He specializes in fair value accounting, specifically for valuation, accounting and regulatory issues faced by alternative asset managers and investors.
Ryan is a managing director in the Portfolio Valuation practice, based in New York. Ryan has more than 10 years of experience and specializes in the valuation of illiquid securities and interests. He provides valuation advisory services to alternative asset managers, including private equity firms, hedge funds and business development companies.
Passages from the episode
“The post-lockdown recovery has transitioned from somewhat of a boom to a store recovery as we approach year-end. Now, there's still tons of lingering concerns as to where we go from here. As you mentioned, some relevant topics impacting private or liquid investments is, you think about monetary policy and the outlook for inflation. That's huge. The inflation spike has been larger than expected but is currently being considered as more transitory, which is caused again from the effects of last year's lockdown and some supply of bottlenecks.” – Ryan Johnson
“When you think about inflation, higher inflation is typically unfavorable to company valuations in the near term. Yeah, again, because it increases your input costs and borrowing costs. In the long term, it reduces the expectations of growth, just putting additional downward pressure on the equity values. That pressure is, again, further compounded in the private equity space, in cases where you have high leverage used to capitalize these companies. In the world of valuation, lower cash flows generally translate into higher capital costs, which results in lower evaluation.” – Ryan Johnson
“If we kind of go back in time, and I don't know that any of us anticipated, if we go back to last year to 2020 in March, where we had some significant public stock market volatility, somewhat I even argue a crash with a 20% to 30% reduction in a couple of weeks or in the month of March, some were arguing back at that time that you couldn't even come to fair value, that you couldn't determine what a market participant would pay, and that we somehow should move away from fair value. The IPEV board issued some special guidance in March of 2020. Does that guidance, is there pieces of it that are applicable in today's world?” – David Larsen
“What we observed is that no asset class is immune to the current market uncertainty and volatility. When thinking about debt investments, a slowdown in the economy and other macro trends will continue to lead to a lot of instruments that we would consider performing to be somewhat distressed or would require a higher rate of return. I think that said, it's important to focus on the fundamentals again, right?” – Ryan Johnson
“My advice to GPs, and anyone again, pricing a liquid private investments is don't panic, right? We might be in unprecedented times, but uncertainty in the financial markets is not uncommon. Once you have good governance, strong valuation for policies and procedures with appropriate layers of review and independent challenge, you're following best practice, essentially.” – Ryan Johnson