The Covid-19 lockdown dislocated the Enterprise Investment Scheme funding world, and it is still trying to recover. Anticipated inflows of investment fell sharply after lockdown. Some portfolio managers were no longer able to make some planned new investments nor to provide follow-on funding on which some portfolio companies were relying. Essentially the dynamics of the marketplace were sufficiently disrupted to cause investors to pause for breath.
While there have been some encouraging signs of revival in interest, there is still some way to go to get back to investor engagement fully restored. To help with this process, advisers may find it helpful to ask fund managers to provide more specific details on how current funding issues are being addressed, and importantly what key considerations are supporting valuations.
Small high-growth businesses need regular funding to support their ambitions. Many, but not all, companies which were priced for growth earlier in the year were suddenly struggling for cash in April and May. Today that challenge still exists. These companies are desperate to attract more funding, but investors remain reticent to invest unless and until they know that they are providing capital to companies at fair value. This point did not take long to gain recognition.
On March 31 this year the International Private Equity and Venture Capital Valuation Guidelines (IPEV) were updated with special valuation guidance from the board in the light of the impact of coronavirus. It wrote:
“It may no longer be appropriate for recent transaction prices, especially those from before the expansion of the pandemic to receive significant, if any, weight in determining fair value
“Greater uncertainty translates into greater risk and increased required rates of return, which generally would indicate that multiples will decrease, even in the absence of recent transaction data’.
Private company valuations
In the pre-pandemic private equity market, fair value would typically be derived by competing investors actively participating in funding rounds. However, in today’s market, there may be a lack of suitors looking to invest in follow-on funding, leaving potentially just one existing shareholder willing to support the company. In this situation, their dilemma is how to price the shares for the follow-on funding.
Consequently, there is a current need for private company valuations to be reconsidered, both at the fund level and on an individual basis. This is required to provide a realistic guide for transactions, to support portfolio reviews, and to restore investor confidence.
‘Independent valuation is an important step in restoring confidence to the EIS markets’
In these circumstances, independent private company valuations can be of considerable value to an Investment committee or a board of directors – and a third-party assessment provides an additional layer of due diligence. And is just as important for investors.
We believe that using independent valuations to inform each interested party is an important step in restoring confidence to the EIS markets.
Years of experience and expertise
Hardman & Co has built up extensive experience across many industry sectors and evaluated businesses with a variety of growth profiles. Our team of capital markets professionals are ideally positioned to consider the impact of real-world circumstances on valuation trends.
This experience across both public and private markets has given us a deep understanding of establishing fair value.
It is this expertise that we are now making available to EIS managers and administrators.
There are three distinct services being offered:
These are commissioned where a completely new assessment of fair value is required because of a specific event, or because an extended period of time has elapsed since a prior capital raise or assessment.
These arise where a second opinion is needed on an existing valuation prepared by a third party. Hardman will review and where necessary challenge the existing assessment.
This service is based on proactive monitoring of portfolio companies giving you time to take appropriate action, rather than relying on assessments at pre-determined dates.
Our aim is to help our clients see things objectively and clearly, and to restore investor faith on tax enhanced investments.
Richard Angus is head of business development at Hardman & Co