Asset managers should prepare for a prolonged period of uncertainty due to the market impact of COVID-19, with robust business planning and forecasting set to play a crucial role, the audience on a recent Jersey Association of Directors & Officers (JADO) webinar were informed.
Rommel Johnson, an Associate Partner at EY in London who co-leads EY’s EMEIA Financial Services Valuations, Modelling and Economics practice, led the latest in a series of sessions held by JADO, covering the impact of COVID-19 on asset valuations. These sessions are intended to share key insights and updates with Jersey’s finance industry.
During the session, a poll was taken to gauge the view from the audience on what they believe the most likely pandemic exit scenario will be, with 45% and 40% expecting an “extended intervention period” and “COVID resurgence scenario”, respectively.
Planning and forecasting should be a key focus for investors, as Rommel explains: “Understanding how underlying businesses are likely to be impacted by economic stress and market volatility is important, as this will fundamentally impact current views on asset valuation and the future performance of these assets held by investors. When we talk about businesses updating their business plans, we need to understand what the underlying macro-economic assumptions are. While the landscape is changing daily, these underlying assumptions will give a strong sense of the level of associated risk involved.”
“These assumptions can be shaped through dynamic business planning and forecasting, an area which EY have been supporting a number of their clients on. It is critical for valuers to ask: what do the forecasts look like and how much risk is associated with delivering them? It’s vital that the level of risk in the forecast is matched by the level of risk in the valuation assumptions. You need to get under the skin of the forecast and assess likely future business performance, by analysing factors such as macroeconomic drivers, customer behaviour, and market expectations for the sector and for comparable businesses.”
Forecasting will be particularly critical for asset valuations within the real estate market. With trends driven by market transactions, and with very little to no transactions data being available, this is causing understandable concern for investors, as Rommel highlights:
“Real estate valuations are driven by market trends, which are ultimately driven by transactions. Hence, the current lack of transaction benchmarks poses a major challenge in valuing heterogenous real estate assets. Valuers will have to make subjective assessments of yield assumptions, and a focus on understanding and assessing the risk exposures to forecast cash flows is critically important.”
Stuart Gardner, EY’s Channel Islands Strategy and Transactions Director, concludes: “Rommel’s presentation will have been of interest to Channel Islands’ based directors and officers in the alternatives space. It does not need saying that this is an unprecedented environment for businesses – the EY ITEM Club’s interim forecast estimated a contraction of 15% to UK GDP in Q2 2020. We don’t know when we will return to normal, but we expect that one of the biggest tests will come when balance sheets are reflated.”
Further guidance on investment asset valuations are provided in EY’s publication Impact of COVID-19 on investment fund asset valuations. You can read the full report here: https://go.ey.com/2YIJsCk.