Today's discussions about Private Equity (PE) often simplify the sector's true nature. When we look closer at how value is created and reported in this sector, there's more to see than what meets the eye.

One common criticism is about self-reporting in PE, where firms report their own financial standing. Though this raises some concerns, it doesn't mean managers can value their portfolios however they want. We, like many others in Europe, follow strict guidelines from Invest Europe. These rules are even tighter in Venture Capital (VC), where the main investments are in companies not yet making profits. The basis for valuating cash-negative companies is either cost or last share price. According to the guidelines further write-downs from this valuation can and should be taken immediately, while there is no room for adjusting the valuation upwards.   

These conservative rules guide VC funds’ returns to follow a pattern known as a J-curve. Early losses are recognized quickly, while profits from successful companies are not recognized until exit, which do often occur late in the fund’s lifecycle to maximize gains. Typically, a fund lasts 10 years, and the reported values may not show the real worth of underlying assets until most investments are realized, and the ultimate fund performance is not revealed until the fund closes.

Now, when comparing PE to publicly listed companies, this plays a big role. The exact mix of the PE portfolio being looked at can greatly affect the analysis. With more investments going into PE and VC globally, many of these funds are in the early stages, or early in the J-curve. For VCs heavily invested in cash-negative companies this makes a direct comparison with listed companies less clear-cut.

This discussion calls for a deeper look into PE and VC, moving beyond simple comparisons. By doing so, we can have a better, more informed discussion about the opportunities and strategies within the PE and VC sectors.

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- Terje Berg-Utby