Monday Market Minute | May 25, 2020

Public markets disconnect from economic reality — what it means for private market valuations

What Moved

By late May, the TSX had recovered approximately 35% from its March lows, erasing more than half the pandemic decline. Yet Canadian unemployment had spiked to 13%, GDP was contracting at the fastest rate in history, and millions remained on CERB. The disconnect between public market prices and economic fundamentals was the widest in a generation. For private market fund managers preparing Q1 and Q2 valuation reports, this created a difficult question: should portfolio company marks reflect the optimism of public markets or the reality of operating conditions?

Why It Matters

Private market valuations are inherently subjective, and the public-private disconnect amplified this challenge. PE managers who marked to public comparables would show a recovery. Managers who marked to operating fundamentals would show continued stress. For LPs evaluating their portfolios, understanding which methodology a GP applied was essential. The gap also created opportunity — if public markets were overshooting, private markets offered a more sober assessment of true economic conditions.

Signal to Watch

Review Q1 fund NAV reports as they arrived. Significant dispersion between GPs' valuation approaches would reveal which managers were marking conservatively versus optimistically.

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