Adviser tells San Joaquin County to expect markdowns once year-end audits arrive

Significant markdowns for private funds are coming once GPs release audited valuations at year’s end, a Meketa adviser said at a recent California county pension system meeting.

Many LPs have raised eyebrows at recent private fund valuations, with pension systems reporting only slight markdowns, despite the direction of public markets and economic headwinds. However, some in the industry believe markdowns will come in end-of-year valuations once auditors review portfolios.

“I’ve been talking with real estate and private equity managers, and I can tell you they believe there will be a fairly significant drop in December when audited reports come together,” Meketa managing principal David Sancewich told the San Joaquin County Employees Retirement Association meeting on December 9.

Buyouts watched a broadcast of this meeting.

In a letter published earlier in 2022, the manager of Harvard University’s endowment reported that private equity and venture capital were among the system’s strongest performers. However, Harvard Management Company CEO NP Narvekar said GPs may not have marked valuations down and would not do so until year-end audits of portfolio companies.

Fake marks

The issue raises concerns with some LPs, who must consider liquidity concerns and attach importance to the accuracy of reported marks. “It’s pretty hard to find private assets without fake marks in this environment,” said one source in the secondaries market.

Another source who is knowledgeable about valuations said some smaller mid- and low-market managers will avoid taking markdowns until end-of-year audits or even until an exit.

“A lot of managers were not particularly worried about quarterly valuations” the source said. “The philosophy is that if being down a couple of quarters it does not mean there is a long-term issue. Others don’t want to deal with marking down or marking up and will adjust valuations once a company is sold.”

“It definitely is a concern since we’re likely headed into a recession, everyone is dealing with inflation and supply-chain issues and interest rates, and there is a lot of volatility,” the source added. “And we aren’t reporting down numbers.”

More resources, eyeballs

Larger managers have more resources and more eyeballs on their operations, which means they regularly report more accurate quarterly valuations, the source said. However, it was also noted that many LPs do not require funds to report audited quarterly evaluations.

“If a large institutional LP says they need quarterly evaluations, then every fund is going to provide quarterly evaluations,” the source said. “I just haven’t seen many LPs asking for it. But if they ask or demand it, then they’d get it.”