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Covid-19 brought businesses and countries to a standstill and it had a significant impact on the financial market. Stock market volatility and the uncertainty caused by business disruption have caused significant fluctuations in commodity prices.

The outbreak has forced governments in the region to take drastic measures to reduce the spread of the virus; ranging from encouraging people to work from home and in some countries imposing complete lockdown. This uncertainty impacts economic activities, and this impact will remain until there is clarity on further governments’ policies regarding this subject matter. The increased uncertainty about the economy outlook triggered a sharp fall in stock markets in the region. In Bahrain, the stock market has witnessed up to 21% drop until May 2020.

Core principles remain unchanged

The current market changes create new challenges for companies when providing accurate and reliable information to investors on the fair value of investments. However, valuation principles and framework remain unchanged under the impact of Covid-19.

Realistic and practical benchmarking, attention to detail and logical commercial narrative will continue to be key fundamentals in private equity valuation. This means fair value should reflect market participants’ assumptions based on the available information as well as the market conditions at the measurement date. But the uncertainty may translate into greater risk and higher required return; and may eventually have a negative impact on the valuation of investments.

key considerations

  • Practitioners need to ensure discount rate and cash flow projections or the lower expected performance has been reflected in the financials but not in market multiples).
  • Valuation should be backed by robust documentation with external evidence to support how the changes in assumptions/ inputs are derived.
  • Additional sensitivity analysis/scenario analysis should also be done to illustrate the impact of any changes in the key assumptions and include the same in the valuation analysis/disclosures.
  • With the complexity of issues involved, funds should plan early in conducting valuations and consider increasing the valuation frequency. 

 

For more download your copy of the report of Private equity valuation issues in the midst of Covid-19.