Valuing Investments during COVID-19 | FTI Consulting

Valuing Investments during COVID-19

Fire Sale Prices and Worst-Case Scenarios Don't Reflect “Fair Value”

Forensic & Litigation Consulting | Financial Institutions

April 9, 2020

Numbers

The emergence of COVID-19 has recently caused market prices to drop dramatically and fluctuate significantly. Investment funds and investors are grappling with the challenge of quantifying the impact of this elevated uncertainty and extreme market volatility around the globe on the value of their investments.

The International Valuation Standards Council (IVSC) and the International Private Equity and Venture Capital Valuation Board (IPEV) both recently released guidance on valuing investments during periods of significant market uncertainty:

  • IVSC’s Technical Boards’ letter
  • Special Valuation Guidance by IPEV

What does this guidance mean for investment valuation?

Key take-aways from the IVSC and IPEV valuation guidance include:

  • No worst-case scenario – IVSC says, “The objective of the valuation is not to stress test a valuation to an extreme case.” Valuations must continue to reflect the most reasonable assumptions based on information available at the time.
  • No fire sale prices – While there may be a short-term liquidity decline, the IPEV reminds us that fire sale prices are not reflective of fair value (as defined in the accounting standards).
  • Beware of recent transaction prices – While recent transaction prices (such as from previous capital raisings) are often a good indicator of current value, in the IPEV’s view, they may no longer be appropriate following the emergence of the pandemic.
  • Don’t over-engineer maintainable earnings – IPEV recommends estimating maintainable earnings excluding the impact of any short-term drop-in earnings. Rather, short term impacts can be treated as a separate deduction.

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