Chart of the Week #44: Intrinsic Value Spread

Here at Arctos, we believe in tracking the intrinsic value (“IV”) of assets based on public market proxies. This allows us to track the difference between the implied IV of an asset to the net asset value (“NAV”), the valuation that managers mark their assets at every quarter, which gives us signals into the potential over (or under) valuation of privately held assets over time. Historically, when the implied IV for any given asset is greater than its respective NAV (“NAV Undervaluation”), there tends to be a higher probability of generating liquidity. In contrast, when NAV is greater than IV (“NAV Overvaluation”), liquidity tends to be constrained as managers do not want to sell their assets at a discounted value to their latest quarterly marks.

We are currently seeing a period of substantial NAV overvaluation, which we believe is a large contributor to the distribution slowdown that managers are currently facing (leading GPs to search for inorganic liquidity opportunities ). While this NAV overvaluation has recovered meaningfully since 2022 thanks to a rebound in public markets (71% to 92%), the remaining spread between NAV and IV implies that distribution yields will likely remain below historical levels over the near-to-medium term.

Clearly, public markets reaching new all-time highs has not been enough to catalyze a rebound in distributions. It is our view that managers will need to proactively mark their assets to market (i.e., closer to true IV), particularly assets that were purchased at record prices in 2021, before we see a rebound in distribution activity. Without these proactive write-downs, GPs will have to wait for assets to grow into the record valuations paid over the last few years, further delaying a “return to normal” for the exit environment. We discuss this and more in our recently published Keystone Q3 2024 Market Update .