Although private company valuations have been declining over the past year, they still aren’t close to reflecting the losses that publicly traded companies have taken. But after the collapse of Silicon Valley Bank, valuations of private companies are now likely to face even more downward pressure.
For companies backed by private equity firms, valuations measured by EV/EBITDA — enterprise value divided by earnings before interest, tax, depreciation, and amortization — declined 13 percent from the first quarter to the third quarter of 2022, according to the latest report from Preqin.
In venture capital, 8.6 percent of deals in the fourth quarter were down rounds, meaning companies raised capital at a lower valuation than their previous funding round. That figure stood at 3 percent in the first quarter of 2022.
“Inflation, rising interest rates, and slower economic growth have driven up risk premiums across markets globally,” the report said. “This has put downward pressure on asset valuations and slowed deal flow in private capital.”
According to the report, the demise of Silicon Valley Bank has exacerbated the valuation outlook for private companies, especially technology startups backed by venture capital firms. The authors expect more restructuring and write-offs in VC. Write-offs and restructurings rose from 2 percent in 2021 to 7.5 percent in the last quarter of 2022, according to the report.
“Our short-term outlook for private equity and venture capital valuations is negative, in line with our forecast for softer performance compared with recent years,” said Angela Lai, a senior research analyst at Preqin. “We expect that the untimely collapse of Silicon Valley Bank will reduce the financing options available to companies, particularly those in the technology sector. It will also deter investors and put additional pressure on venture capital valuations in the coming quarters.”
The EV/EBITDA valuations of private technology companies had already dropped from 21.5x in mid-2021 to 15.5x in the third quarter of 2022, a sharper decline than the one seen in the overall markets, according to the report.
“[Because] IT companies were previously flooded with capital, we expect the decline to continue as they scale back in the economic downturn,” the report explained. “Investors seeking IT opportunities could look to take advantage of this by examining all aspects of a deal carefully, including pressing for more cautious pricing.”
