Portfolio Valuation Trends in 2024

Learning from the past, investors in 2024 are more conscious of the risks in private equity. The attitude has changed from being excessively optimistic to being vigilant. There is a call for transparency and consistency in portfolio valuations. As new technologies emerge, investors have recognized the need for advanced valuation methodologies.

Join us as we go over other emerging trends in portfolio management and valuation.

Portfolio Valuation Trends

Market overview of portfolio valuation

In the public equity markets, we can see a rise in valuations. In the five months since December, the price-to-earnings (PE) ratio of the S&P 500 increased by 2.73 points or 11.01%. However, on a year-on-year basis, the S&P 500’s PE ratio has increased by 4.43 points or 19.16%.

Source: Macrotrends

Now, let us turn our attention to the private equity valuations, specifically startup valuations. According to Pitchbook, in the US, in Q1 CY24, median valuations at early-stage rounds and late-stage rounds rose 16.3% to $46.5 million and 36.1% to $70.1 million, respectively from the previous quarter.

Thus, across public and private equity, we can observe an improvement in investor optimism.

Another encouraging sign is that the relative velocity of value creation (RVVC), i.e. the annualized increase in valuation between funding rounds, improved from 30.3% in 2023 to 36.2% in 2024 for early-stage startups. However, in the same period, the same metric dropped from 14.7% to 11.2% for late-stage startups.

Increasing popularity of portfolio valuation

According to Private Equity International (PEI), since 2013, the total capital raised in the top 300 private equity fundraisers has grown steadily at a CAGR of 10.13% to $3.28 trillion. Back in 2007, The Carlyle Group had raised $32.5 billion in the preceding five years- the most among all private equity firms. Now, in 2024, they would not have made the top 10 list with those figures.

Slowly but surely, the private equity market has grown. As the private equity market grows and new investors join in, the demand for portfolio valuation services grows. An unfortunate feature of private equity has been the opacity of investment values. This is something that discourages new entrants and causes suboptimal decision-making among existing private equity investors.

However, we are actively heading towards transparency of PE investment values through portfolio valuations.

What Are the Key Portfolio Valuation Trends in 2024?

Increased focus on transparency and consistency

Private equity investments are considered the riskiest asset class. And, as mentioned earlier, it is also the most opaque asset class. Hence, there is a constant push for reliable real-time investment analytics data. 

At the same, investors would prefer if their fund managers focused on identifying the next big investment opportunity. To effectively solve this equation, independent valuation experts are being employed. This ensures investors get a transparent view of their portfolio consistently.

Adoption of advanced valuation methodologies

With the advent of blockchain technologies and as we step closer to web3, traditional valuation methodologies must be upgraded to evaluate the new types of assets being created. Valuation experts must understand tokenomics. In addition to estimating user growth, valuation experts must also estimate developer activity which affects how fast a technology is adopted by a critical mass.

A benefit of blockchain for portfolio valuation is that we can record valuation updates on blockchain. Such records will be tamper-proof and easy to share. Suppose a startup gets an independent valuation and records it on a blockchain along with the valuation report. Then, it can securely share access to its investors.

Emphasis on risk assessment and management

When we are valuing startups involved in web3 and blockchain, we must understand how secure their digital assets are. After all, security breaches can lead to the loss of digital assets and significantly deplete a company’s financial health. So, when investors have such startups in their portfolio, they emphasize the need for regular risk evaluation and management.

However, the emphasis on risk assessment and management from investors is not just when they are investing in web3 and blockchain startups. If we refer to Pitchbook’s data, the annualized increase in valuation between funding rounds has dropped significantly since the peaks reached in 2020 and 2021. This suggests that the investors have shed the excess optimism. They now seek accurate valuations for their investments that incorporate the risk sufficiently.

Regulatory compliance and reporting requirements

With every passing year, there is an improvement in investor education that only strengthens the demand for transparency. In 2024, this has culminated in investors seeking valuation updates that adhere strictly to accounting standards and disclosure requirements. 

In the context of portfolio valuations, investors now seek updates and reports that comply with Accounting Standards Codification (ASC) 820. Adherence to ASC 820 ensures that the portfolio valuation update meets all disclosure and fair value measurement requirements.

Importance of valuation for strategic decision-making

Investors are becoming increasingly aware of the need for valuations in their decision-making process. Without regular valuation updates, it is difficult to create a strategy for one’s portfolio. While many investors would not want an active role in the companies they invest in, they will still want to know how and where it derives its value and its plans to improve value creation. 

Investors need to know the risks involved as much as the current and expected market valuation. Otherwise, planning exits can be like playing blindfolded chess where your opponent doesn’t announce their moves. The player would not know what kind of predicament they are in.

What strategies are being used to improve portfolio valuations in 2024?

In 2024, the following strategies are being used to control the risks to portfolio valuations and to improve the accuracy and quality of valuation insights.

• Diversification – When you diversify, i.e. invest in multiple assets instead of just one, you are reducing your portfolio’s vulnerability to a particular asset failing. If you invest in only one company, your entire portfolio goes down when this company goes down. But, if you had invested in two or more companies, the fate of one single company has a lesser say on your portfolio return. We can say similar things about investing in only one sector or asset class.
• Reporting absolute return – When an asset is held for multiple years, it is helpful to know its annual returns, hence we pay attention to compounded annual growth rate (CAGR). But what if the asset was held for less than a year? Then, the CAGR does not signify a normalized annual return. Rather, it represents the assumption that the current trend will always continue. Thus, only looking at CAGR can lead to misinterpretations. Instead, investors must also look at their portfolio’s absolute returns.
• Independent valuations – Fund managers and portfolio management service providers are fully capable of valuing a portfolio. However, since they have an incentive to paint a pretty picture, this leads to a conflict of interest. Institutional investors have recognized this and are relying on independent valuation experts. This helps investors have an accurate view of their portfolio’s performance.
• Process enhancements – Instead of publishing sporadic reports, institutional investors are slowly adopting dashboards that provide regular updates on investment value, investor returns, and risk factors. Such dashboards have long been available for publicly traded assets and were much awaited by private equity investors. Now, private equity investors need not run behind relationship managers to simply get a breakdown of their portfolio’s performance.
• Holistic operational assessments – To improve the accuracy of portfolio valuations, we can holistically assess a startup’s every operation instead of just focusing on market conditions and comparable transactions. While assessing factors like the total addressable market (TAM) helps identify the value of opportunity for a startup, assessing operational efficiency helps us understand how well it can exploit the said opportunity.

How can you get a reliable portfolio valuation in 2024?

Getting a reliable portfolio valuation is the first step in portfolio management. However, if you invest across asset classes, you must understand how to value different assets. For this, you will need an extensive knowledge of economics and various industries. You must also be proficient in using various methodologies. 

To ensure that you get the most reliable portfolio valuation in 2024, you can use the following strategies:

• Use a hybrid approach– Every asset class reacts to a different set of factors. Bonds react mainly to interest rate changes and startup investments react to market conditions and company-specific factors. Hence, using the same valuation methodology for all assets is not wise. We must take a hybrid approach, i.e. use a combination of methodologies to value a portfolio.
• Use standard business valuation techniques – Standard business valuation techniques such as option pricing, discounted cash flows (DCF) method, and the Berkus method can be sufficient for accurately valuing traditional companies.
• Use advanced valuation methods – If you are investing in new-age technology startups, you must apply advanced valuation methods that can effectively leverage tokenomics and estimate user growth and developer activity.
• Seek professional assistance – If you are not a full-time investor, even if you understand how each of your assets works, it will be difficult for you to value them regularly. You simply might not find the time for it or keeping up with all material events will be challenging. Instead, you can leverage Eqvista’s monthly portfolio valuation services for a nominal fee.

Get regular portfolio valuations with Eqvista!

In 2024, we can observe valuations in public equity rising steadily. On the other hand, private equity investors remain cautious of exorbitantly high valuations like the ones in 2020 and 2021. This is an encouraging sign for the asset class. It is a sentiment that is driving the demand for transparent and consistent portfolio valuations.

At Eqvista, we empathize with investors on the need for transparency and deliver portfolio valuations that meet all disclosure requirements. Contact us to learn more about our portfolio valuation service!