In our whitepaper, we categorize valuation levels across various asset classes and seek to use historical performance to analyze the relationship between asset valuations and the timing of certain investments.
What You'll Learn
Asset valuations, measured through metrics like P/E ratios for public equity or EV/EBITDA for private equity, credit spreads for private debt, and capitalization rate spreads for private real estate provide a means of assessing historical trends.
The paper employs a five-tier framework to categorize valuation level to price —Very Cheap, Cheap, Fair, Expensive, and Very Expensive—to categorize valuation environments across asset classes. This approach provides a structure to then evaluate how historical performance outcomes have varied in different valuation conditions.
Valuation levels, whether high or low, tend to revert toward historical averages over time. This observed pattern emphasizes the importance of considering valuation levels in a historical context.
Historically, investing at lower valuation entry points resulted in higher returns across all asset classes, while investing at higher valuation entry points led to lower returns. However, valuations adjust over time, contracting or expanding to reflect the intrinsic value of an asset.
Valuation metrics, when combined with an understanding of macroeconomic trends, can help contextualize historical asset class performance. Observing how valuation levels and broader market conditions interact may offer insights into market behavior.
