Pricing in macro risks (eg, coronavirus) to deals with exposure?

February 28, 2020

by a searcher from Stanford University - Graduate School of Business in New York, NY, USA

Hi SearchFunder,

Does anyone have valuation guidance in considering macro-risks (eg, public health, market cycles, regulatory uncertainty) to deals with exposure?

I understand this is a vague question. For context, we’re looking at a travel business that’s already experiencing a dip in bookings and expecting a soft 2020 due to coronavirus in both its Asia and non-Asia products. I’m wondering if anyone has dealt with similar macro-risks and has guidance on how to underwrite the risk appropriately and fairly?

Many thanks,
Connor

Reply by an investor
in Palm Beach, FL, USA

Connor industry-level uncertainty driven by macro variables are extremely hard to price. Contingent payment structures can help close some valuation gaps. When uncertainty is at peak levels deal activity freezes with deals limited to distressed sellers. This may create a different type of investment opportunity including highly structured minority investments with strong protections such as liquidation preference and options to add to the position. Hope this is helpful.

Reply by an investor
from Harvard University in San Francisco, CA, USA

Hi Connor - I agree with ^redacted‌ at a high level. Speaking from experience in the travel industry, I think there’s simply too much uncertainty at this moment in time to figure out an appropriate deal structure. Not sure what type of travel business it is, but there’s a good chance that we’re looking at a rough 2020 AND 2021 for international travel.

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