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Making sense of the valuation landscape
Financial forecasting is complex at the best of times, but economic volatility and high inflation have made it even tougher. How is this affecting the valuation landscape – especially when traditional approaches, such as reviewing historical performance figures, are no longer as reliable in this unpredictable environment?
Some experts believe we’ve entered a recovery phase. But high inflation and rising interest rates have made it harder to value companies, assets, and investments. Businesses are taking different approaches to recovery, leading to wild variation in valuation multiples. Plus, with a lack of recent transactions in certain industries, we need to be cautious about price benchmarking. That’s also why it’s important to understand the advantages and drawbacks of different valuation approaches and adopt techniques that are more suitable to the current climate.
Other experts point to the large amount of cash looking for a home – as much as US$2 trillion dollars of ‘dry powder’. At a certain point, all this private equity will have to be invested, deployed, or paid out as dividends. This is driving the divergence between value and price, which is likely to continue creating challenges (and opportunities) for valuation professionals.
The question of automation
Will automating valuation help us make sense of the valuation landscape? Some experts concede that it’s tempting – though perhaps inadvisable – to push for it when there’s a lack of stability. And while the benefits of integrating AI and machine learning into valuation processes are clear, consultants tend not to be the quickest to adopt new technology. Sometimes, though, it only takes one person to take the plunge to encourage the rest to follow.
Another view, however, holds that valuations are a fundamentally human process that technology can’t replicate, and that value depends on what the market is willing to pay. In the absence of genuine market testing, a valuer’s role is essentially to mimic the way investors would price a target to provide an estimate of market value. If human beings are driving investment decisions, they should be driving valuation decisions as well.
The future is undoubtedly a combination of the two. The onward digital march is inevitable, offering valuers a wealth of data. But we still need commercial reasoning, which relies on human insight.
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Learn more about these and many other aspects of valuation in our white paper: Exploring the valuation landscape in 2022.
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through an ESG lens
READ MORE
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Download
the white paper
Learn more about these and many other aspects of valuation in our white paper: Exploring the valuation landscape in 2022.
The question of automation
Will automating valuation help us make sense of the valuation landscape? Some experts concede that it’s tempting – though perhaps inadvisable – to push for it when there’s a lack of stability. And while the benefits of integrating AI and machine learning into valuation processes are clear, consultants tend not to be the quickest to adopt new technology. Sometimes, though, it only takes one person to take the plunge to encourage the rest to follow.
Another view, however, holds that valuations are a fundamentally human process that technology can’t replicate, and that value depends on what the market is willing to pay. In the absence of genuine market testing, a valuer’s role is essentially to mimic the way investors would price a target to provide an estimate of market value. If human beings are driving investment decisions, they should be driving valuation decisions as well.
The future is undoubtedly a combination of the two. The onward digital march is inevitable, offering valuers a wealth of data. But we still need commercial reasoning, which relies on human insight.
Some experts believe we’ve entered a recovery phase. But high inflation and rising interest rates have made it harder to value companies, assets, and investments. Businesses are taking different approaches to recovery, leading to wild variation in valuation multiples. Plus, with a lack of recent transactions in certain industries, we need to be cautious about price benchmarking. That’s also why it’s important to understand the advantages and drawbacks of different valuation approaches and adopt techniques that are more suitable to the current climate.
Other experts point to the large amount of cash looking for a home – as much as US$2 trillion dollars of ‘dry powder’. At a certain point, all this private equity will have to be invested, deployed, or paid out as dividends. This is driving the divergence between value and price, which is likely to continue creating challenges (and opportunities) for valuation professionals.
Financial forecasting is complex at the best of times, but economic volatility and high inflation have made it even tougher. How is this affecting the valuation landscape – especially when traditional approaches, such as reviewing historical performance figures, are no longer as reliable in this unpredictable environment?
Making sense of the valuation landscape
eight insights
Global value creation stories
Corporate website
©2023 Eight International