The Private Equity Toolkit: A Step-by-Step Guide to Getting Deals Done from Sourcing to Exit by Tamara Sakovska

Author:Tamara Sakovska [Sakovska, Tamara]
Language: eng
Format: epub
ISBN: 9781119697114
Published: 2022-04-19T00:00:00+00:00

Valuation Methods

We all appreciate that there are scores of valuation methods available for valuing a private equity target. My personal philosophy is fairly simple: use all possible methodologies, including the ones that might be somewhat deficient—as long as I understand the potential caveats. The more data points I can generate, the easier the valuation exercise becomes: after a while, I begin to get a sense of a value range that can plausibly reflect the company's worth.

A good starting point is to determine where the market is pricing similar companies and transactions.

Publicly listed comparable companies. In a perfect world, the publicly listed universe used for this analysis should consist of companies that are similar and relevant to the investment target. It is best to keep the comparison to the same geography and the same industry, if possible, in order to minimize the potential impact of accounting differences, uneven capital requirements and dissimilar growth prospects. Once the comparable universe is identified, there is plenty that can be done. The most obvious advantage of this valuation approach lies in the large volume of publicly available data that can typically be sourced for listed businesses. One can add useful dimensions to the analysis by gradually introducing additional layers of complexity. For example, I might start by calculating static multiples, such as those we discussed above—EV/Sales, EV/EBITDA, EV/OpFCF and industry benchmarks—on a historic and forward basis. However, given that I am valuing a company that my fund will hold for 4–6 years, it also makes sense to consider cyclicality of the most relevant multiples over a longer time horizon, such as over 5, 7 or even 10 years. This analysis will immediately enable me to achieve two things. First, I will be able to develop an informed view on how sensible the entry valuation multiple for my transaction might appear in the context of historic values. Second, I can calibrate a range of plausible multiples that my investment might achieve at exit. It is probably an obvious statement, but I am going to make it anyway: if you invest in a business in buoyant times and pay a record-high multiple, it is prudent to assume a lower multiple at exit—and every thoughtful investment committee will undoubtedly ask you to do exactly that.

Any analysis of publicly listed comparable companies can add value in a number of additional ways: I can opt to look at means and averages, or choose to review specific outliers in greater depth. Virtually any multiple is capable of revealing more information when it is displayed on a scatterplot against the most relevant growth or earnings metrics: EV/Sales versus sales growth; EV/EBITDA versus EBITDA growth; P/BV versus return on equity; and so on. This approach of displaying information visually for the entire universe of comparable companies can help you determine the magnitude of the expected valuation premium.

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