Private Capital Investing

CHAPTER 7Valuation

INTRODUCTION

Valuation aims to provide a value to the economic capital of a company. We can categorise the various methodologies as based in the asset side and equity side. In the first case, the value of the economic capital is estimated indirectly by estimating the current value of the company and then subtracting its net financial indebtedness. From the equity-side perspective, the market value of the shares is instead determined directly. The two perspectives of analysis should in any case lead to an equivalent result in terms of estimation of the value of economic capital, if the evaluation parameters and assumptions have been chosen consistently.

The following present the most used valuation methods in private capital:

1. financial approach: the method of discounted cash flows (DCF) asset side, and the method of the adjusted present value (APV);
2. comparative approach: the method of market multiples and multiples of transactions.

While we do not deal with this topic in great detail in this book, it is important to provide a concise outline of the different techniques since the determination of a price is at the basis of a private equity transaction.

FUNDAMENTALS #1: PRICE AND VALUE

There is a significant difference between the value and price of a company. Value represents a quantification of target per se and does not consider external elements such as potential buyers. Price is the amount of money that a buyer is willing to pay in a transaction.

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