Marking the Market

Private funds are a hot topic today. After the episode of First Brands and the “cockroaches” comment from Jamie Dimon, they are being subject of an increasing scrutiny. At the center of that scrutiny is their valuation policies. How do you value a private asset that by definition is not subject to market forces? It besomes an art, particularly in times of stress. The chart below is a good example of how subjective valuations can be, and the dangers associated with private assets. What you can see below is how the same loan is priced by 7 different Private Credit GPs. In “normal” times, like 2023, the difference in the price of the same loan by manager can have a spread of 5% between the most generous and the most conservative mark. But as stress rises, that spread can become as big as 14%, for the same loan, which is almost always an unequivocal sign, that something is not right. And as you can see, that spread in March 2024 translates into a 50% loss of value. Obviously, this has implications in performance and collected fees, which are calculated on AUMs. This is the flip side of privacy and illiquidity.

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