While true valuation numbers won't be released until early 2024, private equity and private credit managers are being more realistic with valuations, said Jeremy Swan, managing principal of accounting firm CohnReznick's financial sponsors and financial services industry practice.
On the private credit side, CohnReznick executives are seeing an increase in write-downs and an increase in liquidity concerns than they have seen in the last few years, Swan said.
Managers with riskier portfolios have pushed valuations as far as they could, he said.
"They've seen some distress and covenants tripped (breached) where there were covenants," Swan said.
There's been some distress but not a huge percentage of their portfolios, he said.
Even so, in 2024, their private credit assets will be "written down or exited in one shape or form," Swan added. "Our restructuring team is starting to get more calls," he said.
The lack of IPOs and transactions are making arriving at valuations in private equity and private credit more difficult, Swan said.
"It's more of an art than a science," he said. "While there are formulas, the art comes into play as to which companies are the comparative companies and which company transactions are the comparative transactions," Swan said.
In private equity, Scott Sperling, co-chief executive officer of private equity firm Thomas H. Lee Partners LP, said "valuations have come down in terms of the key valuation metrics but not as far as I had expected."
THL had $14.7 billion in assets under management as of Sept. 30.
"In 2024, I think it is important to be very careful on valuations," Sperling said. "My own belief is that inflation will be higher for longer … more likely in the 3.5% to 5% range. … We're not going back to a 2%" rate.
Sperling said rising bankruptcies in 2023 will continue to go up over the course of 2024.
"It will present an opportunity for folks like us," he said.