US and European buyout firms face writedowns

The likely writedowns will be at firms that report in dollars or euros, which will be hit by both a lower value of sterling assets and reductions in the value of the UK-listed firms used for portfolio benchmarking, according to two London executives at firms based in Germany and the US, respectively, who declined to be identified.

An investment associate at a major US private equity firm said “there will be writedowns”.

Michael Collins, who is due to take the helm as CEO of Invest Europe in October, said: “The FTSE 100 has recovered, the 250 hasn’t, so if that is what you’re using as your benchmark you’re still likely to be seeing that the value has declined.”

The FTSE 250 has fallen 4.07% in the past month and 6.05% since the start of the year, as at 2.45pm on July 1. Sterling’s value against the dollar when the quarter ended on June 30 hit a daily low of 1.32, 8% lower than the daily average of 1.44 at the end of the first quarter.

Ryan McNelley, a managing director at valuation and corporate finance adviser Duff & Phelps, said: “You may have credit funds in particular that will say this has a neutral impact on their business and you don’t see much of a writedown at all. You may have moderate writedowns of 3%, 5% in some sectors, and then in other very specific [portfolio] companies you may see writedowns in the order of magnitude of 30% or 40% if it’s banking or financial services.

“A lot of these markdowns and the analysis that goes around this is going to take place around the coming two to six weeks.”

A lot depends on how individual firms calculate the value of their portfolios. One executive at a European mid-market firm said: “We would not bench against an index,” but said individual companies would be looked at for comparisons.

Collins said: “If you are reporting your returns or calculating values in US dollars but your asset is in UK pounds then you’ve just taken a hit on the dollar valuation of those assets of whatever the percentage is that the pound has now fallen.

“The [percentage] that the pound has declined – all things being equal – that’s the impact you are going to see if you’re converting GB pound assets into a dollar valuation, but all the things tend not to be equal because there are so many other variables knocking around.

“Right now it’s a number on page rather than a real loss,” he added.

Firms that report their earnings in dollars include US buyout giants KKR, Carlyle and Blackstone. Only a small portion of Blackstone’s holdings are in sterling, according to a person familiar with the matter.

The degree to which firms made second-quarter writedowns will depend on whether they view the volatility as quickly passing or here to stay, a US buyout executive said. In the energy sector, for example, sellers have been able to predict growth, but that will be harder to justify now, he said. Firms investing in struggling assets might opt to take the hit sooner rather than later, he added.

Private equity owners work with their portfolio companies to create year-ahead forecasts. Although firms could take a “subjective view” on forecasting, the US buyout executive said, they also have to comply with third-party valuations.

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