Valuation methods used by portfolio managers of unlisted equities for reporting versus exit purposes

Abstract

This report investigates valuation practices among portfolio managers of unlisted equities in Southern Africa, an under-researched area. Employing an explanatory sequential mixed methods approach— beginning with quantitative analysis of valuation data supplied through a survey and followed by qualitative interviews—the study explores the reasons behind valuation choices. The research addresses three questions: (1) Do portfolio managers employ valuation methods at reporting—per IFRS 13—that align with those expected at exit? (2) Are the valuation methods used for reporting and exit diverging, and are certain approaches associated with larger valuation revisions? (3) What motivates the selection of specific valuation techniques when different methods are employed? Unlisted companies constitute a significant portion of global enterprises and contribute substantially to GDP. Many listed entities hold large stakes in private firms, often reflecting these valuations in financial statements. Valuations serve multiple purposes, including regulatory compliance, taxation, dispute resolution, reporting, and transactions such as exits. The study finds that portfolio managers often use divergent valuation methods at reporting and exit, influenced by factors such as purpose, the valuator’s training, and data availability. Most managers tend to fairly report or slightly under-report investments before exit. Although no single valuation method was conclusively associated with inaccuracies, inconsistent approaches led to higher valuation revisions over time. Employing the same valuation method at both stages could improve accuracy, despite justifications for differing approaches. The study also explores exit multiples as proxies for valuation revisions, making it one of the first assessments of valuation accuracy for unlisted entities in southern Africa. Overall, maintaining consistent valuation practices is crucial for reliable investment measurement.