Falling Valuations Dull the Shine of Private Assets, Curb Exit Options

Singapore-based Morrison Foerster corporate partner Lip Kian Ang was quoted in a recent article, “Falling Valuations Dull the Shine of Private Assets, Curb Exit Options” published by The Business Times.

The article explores how the appeal of private market assets may be fading as valuations fall amid rising caution, with market watchers expecting the most significant corrections to unfold in venture capital (VC) funds, specifically in relation to technology and growth companies.

VCs have been observed to use convertible instruments, such as a convertible note or a Safe (Simple Agreement for Future Equity) that does not require investors to commit to a valuation, more frequently.

As Lip Kian comments, “Instead, the [convertible] instrument will convert into shares using a formula tied to the valuation set in a subsequent priced round.” The firm has also noticed higher discount rates upon conversion involving convertible note transactions.

He adds that cyclical businesses requiring additional cash infusions are more susceptible to a downward valuation adjustment. He continues, “Less cyclical businesses, such as research and development in life sciences, where investors take a much longer-term view, are less likely to be affected.”

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