This ongoing valuation is particularly important in private equity There has

This ongoing valuation is particularly important in

This preview shows page 65 - 66 out of 226 pages.

This ongoing valuation is particularly important in private equity. There has been a hotly contested finding that the best funds have systematically outperformed the market. The first sign of a breakdown in this finding should be seen in portfolio valuation falls. 2.1.30 How do private equity funds value unrealised investments? Detailed guidelines intended to represent current best practice on the valuation of private equity investments are published in International Private Equity and Venture Capital Valuation Guidelines (‘IPEV Guidelines’). In summary the IPEV Guidelines identify six different ‘most widely used’ methods available to value an investment. Within each method there are a number of variables that require a decision on the part of the valuer. 1. Price of a recent investment: when a recent investment has been made in a company, the implied market value of the company in that investment round may be used to value any instrument. In first investments, this means that they are valued at cost. In further investments (for example a development capital or a rescue) the total investment (including any earlier rounds) might be valued at the price of the latest investment. 2. Earning multiple valuations: these are commonly used for profitable investments. There is an array of alternative methods including: (a) P/E ratios: equity value/profit after tax; (b) EBIT multiples: enterprise value/earnings before interest and tax; (c) EBITDA multiples: enterprise value/earnings before interest, tax, depreciation and amortisation. Each calculation can be performed using historical, current, ‘sustainable’ or projected data. It is usual to use comparable ratios derived from the quoted markets and/or relevant recent transactions. Having decided which of the potential comparable market ratios to use, it is normal to apply a discount to the quoted market ratio to reflect a liquidity discount. This discount may be reduced if a fund manager believes a sale or flotation to be imminent. 3. Net asset valuation (NAV): where a business is not profitable or carries out an activity that is essentially involved with purchase and management of assets (such as a property investment company) they may be valued by reference to their net tangible assets. Goodwill created by the acquisition should normally be excluded along with certain other intangible assets. As in an earnings valuation based on market comparators, a discount is typically applied to the tangible asset valuation. 4. Discounted cash flows (DCFs) in the company: economic theory tells us that the present value of any asset is the value of its future cash flows discounted to reflect the time until the cash is received and the risk that the cash flow will vary. DCFs, therefore, have the strongest theoretical underpinning. However, in practical use they are extremely sensitive to the assumptions made regarding discount rates and timing of cash receipts. Furthermore, there is a requirement to estimate the value of the business at the end of the discrete period for which cash-flow estimates are available. This is itself a valuation estimate.
Image of page 65
Image of page 66

You've reached the end of your free preview.

Want to read all 226 pages?

  • Fall '18
  • Private Equity Demystified

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes