Chapter 10
Valuation of private equity companiesa
10.1 INTRODUCTION
Valuation is a process in which the private equity professional estimates the value of a company’s assets based on a series of relevant variables that are perceived to affect the long-term performance and success of the company. It is important that investors understand the fundamental factors that drive the underlying value of the companies in which they choose to invest. While valuations are critical for successful private equity investors we need to be aware of several aspects:
- Valuations may be quantitative but they are usually not objective or precise
- Valuations age quickly, they can change significantly as new information becomes available
- Valuations can take significant time and effort but are very informative. They help the valuer better understand the business.
The principles of valuing private companies are similar to those of valuing public companies; however, there are estimation problems that are unique to private companies. For instance, the valuer needs to deal with limited information available in terms of history and depth because private firms do not report their performance publicly and do not need to meet accounting and reporting standards that apply to public entities in many countries. Another significant hurdle when valuing private firms is the difficulty of estimating risk parameters for discount rates. These require stock prices for equity which are not available for private firms. Further, ...
