Key Takeaways
- • The public-to-private equity valuation disconnect that widened significantly during 2022 appears exaggerated, with market conditions suggesting a potential convergence as public equities have become relatively more expensive than private market valuations for the first time in three years.
- • Investment company sector performance in 2022 was notably weak, with only one public trust beating its benchmark—a stark illustration of broader market headwinds affecting global equity funds during the period.
- • Private equity NAV valuations face persistent criticism from investors who argue internal appraisals are outdated and unrepresentative of true portfolio value, particularly given the infrequent and non-daily pricing mechanisms that characterize private markets compared to public exchanges.
- • The structural differences in valuation methodology between public and private markets—daily pricing versus periodic internal appraisals—create persistent opaqueness around private asset values, though practitioners argue the disciplined processes underlying PE valuations merit investor confidence.
Summary
The investment companies sector endured a challenging 2022, with global equity funds experiencing widespread underperformance against benchmarks. Only a single public trust managed to exceed its performance target during the year, highlighting the severity of market conditions that constrained returns across the institutional investment landscape.
A central debate within alternative and institutional investment circles concerns the widening valuation gap between public and private equities. The conventional wisdom has held that private equity NAVs substantially lag true portfolio values due to outdated appraisals and the structural limitations of internal valuation processes. However, recent market developments suggest this disconnect may be more pronounced than fundamentals warrant. For the first time in the past three years, public equities now trade at valuations commanding a premium relative to private markets—a reversal that implies either private assets are undervalued or public markets have overcorrected to the upside.
The criticism of private market valuations centers on their opaque methodology. Unlike public equities, which trade continuously with transparent pricing discovery, private equity valuations rely on internally conducted appraisals performed infrequently. This structural difference creates legitimate questions about the representativeness of reported NAVs, particularly during volatile market periods when asset prices shift rapidly. Practitioners counter that while private valuations lack daily market pricing, they employ rigorous and disciplined processes designed to reflect economic reality, even if less frequently updated than public markets.
The convergence now visible in relative valuations suggests institutional investors may have overcorrected their positioning during 2022's market downturn. As public equities have recovered selectively while private market valuations remain conservatively anchored, the historical premium investors assigned to private assets relative to public peers appears less justified on purely valuation grounds. This recalibration carries implications for capital allocation decisions among institutions, family offices, and alternative investment managers reassessing their exposure to public versus private equity across their portfolios.
A central debate within alternative and institutional investment circles concerns the widening valuation gap between public and private equities. The conventional wisdom has held that private equity NAVs substantially lag true portfolio values due to outdated appraisals and the structural limitations of internal valuation processes. However, recent market developments suggest this disconnect may be more pronounced than fundamentals warrant. For the first time in the past three years, public equities now trade at valuations commanding a premium relative to private markets—a reversal that implies either private assets are undervalued or public markets have overcorrected to the upside.
The criticism of private market valuations centers on their opaque methodology. Unlike public equities, which trade continuously with transparent pricing discovery, private equity valuations rely on internally conducted appraisals performed infrequently. This structural difference creates legitimate questions about the representativeness of reported NAVs, particularly during volatile market periods when asset prices shift rapidly. Practitioners counter that while private valuations lack daily market pricing, they employ rigorous and disciplined processes designed to reflect economic reality, even if less frequently updated than public markets.
The convergence now visible in relative valuations suggests institutional investors may have overcorrected their positioning during 2022's market downturn. As public equities have recovered selectively while private market valuations remain conservatively anchored, the historical premium investors assigned to private assets relative to public peers appears less justified on purely valuation grounds. This recalibration carries implications for capital allocation decisions among institutions, family offices, and alternative investment managers reassessing their exposure to public versus private equity across their portfolios.
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