Are PE valuations too high—and would we know?

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The Weekend Pitch

April 2, 2023

Presented by Masterworks

(Jenna O'Malley/PitchBook News)

Should there be a better way to value private equity assets? It's a question that's been on my mind since last year, when public equities took a massive dip but private market valuations remained high.

I started working on this story in late February, just a couple of weeks before the failure of Silicon Valley Bank brought wider banking instability issues into stark relief.

With the specter of a new financial crisis looming over all asset classes, the question of how to value private equity investments rings even louder than before.

Welcome back to The Weekend Pitch. I'm Jessica Hamlin, and you can reach me at jessica.hamlin@pitchbook.com or on Twitter @jessicaAhamlin.

To answer this question, I took a deep dive into the methods PE firms and auditors use to estimate the value of the companies they buy. I surfaced with a deeply unsatisfying conclusion.

Autopsy of a bank collapse

Democrat Sherrod Brown questions FDIC Chair Martin Gruenberg, left, and the Fed's Michael S. Barr, right.
(Tom Williams/Getty Images)

Michael S. Barr, the Federal Reserve's vice chair for supervision: "I think we're going to be unflinching in our review."

Rep. Pete Sessions: "Does that include your role?"

Barr: "Absolutely."

A blame game took place on Capitol Hill this week as Congress put Fed and Treasury officials under a magnifying glass.

Two days of hearings made it clear that the Fed didn't know how to handle a bank that dealt almost exclusively with Silicon Valley and had a unique risk profile. Politicians took aim at a regulatory system that was ill-suited to sufficiently assess banking practices by lenders like Silicon Valley Bank and Signature Bank. That system enabled mismanagement and reckless risk-taking by members of the leadership teams at both banks.

Trivia

AI and machine learning are attracting attention and investment from hungry investors looking for the next big thing. According to our data, how many deals were closed in the vertical in 2022?

A) 4,783 deals
B) 8,900 deals
C) 3,469 deals
D) 6,727 deals

Find your answer at the bottom of The Weekend Pitch!

LPs pull the plug on China

(Avigator Fortuner/Shutterstock)

In a difficult year for the VC ecosystem of Greater China—defined as mainland China, Hong Kong, Macao and Taiwan—few data points were rosy. But the fundraising picture was especially dire.

Chinese fundraising activity plummeted to a nine-year low with $44.5 billion committed across 273 funds, according to our H2 2022 Greater China Venture Report.

High levels of dry powder held by GPs will offset this somewhat, but the trend will nevertheless drag on future startup investment.

Japan's corporations dive into VC

(Matej Kastelic/Shutterstock)

Japanese corporations have a lot of cash on hand, and they're putting it to work. Between 2015 and 2022, Japan's corporate venture capital (CVC) programs invested in at least half of all domestic venture deals, with a record 62% participation in 2020.

In fact, the number of active Japanese CVCs has consistently exceeded that of traditional VC firms in the country over the past decade, and analysts expect corporations will continue to play a vital role in the country's nascent venture market.

Deep dives into 3 emerging tech sectors

(Kentoh/Shutterstock)

Technology moves at the speed of light, making it hard for investors to know what's worth their time and investment dollars. PitchBook's emerging tech reports have you covered. Our latest reports on insurtech, artificial intelligence and machine learning, and ecommerce have all the insights, trends and data you need to win.

Quote/Unquote

"Should we develop nonhuman minds that might eventually outnumber, outsmart, obsolete and replace us? Should we risk loss of control of our civilization? We call on all AI labs to immediately pause for at least 6 months the training of AI systems more powerful than GPT-4."

—Elon Musk, Steve Wozniak, Andrew Yang and others in a letter urging governments to intervene and pause development on AI.

Trivia

Answer: D)

We tracked 6,727 deals in 2022 within the AI and machine learning vertical. You can read more about those deals in our Q4 2022 Artificial Intelligence & Machine Learning Report.

This edition of The Weekend Pitch was written by Jessica Hamlin, Emily Burleson, Sam Steele and Jacob Robbins. It was edited by Andrew Woodman and Ron Prichard.

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Are PE valuations too high—and would we know?

Autopsy of a bank collapse

Trivia

LPs pull the plug on China

Japan's corporations dive into VC

Deep dives into 3 emerging tech sectors

Quote/Unquote

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