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Private Equity Operational Due Diligence: Tools to Evaluate Liquidity, Valuation, and Documentation by Jason A. Scharfman

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CHAPTER 5

Valuation Techniques, Methodologies, and Standards

Valuation is one of the areas that Limited Partners (LPs) tend to focus their efforts on during the operational due diligence process. Understanding and diagnosing operational risk in the valuation process is certainly an area that may be fraught with considerable operational risks. Investors who take care to appropriately understand not only the valuation methodologies employed by a particular private equity fund but also the ways in which such theories are put into practice will also likely gain insights into other areas of a firm's operational risk exposures. This further highlights the central area of private equity fund valuation, as many other operational functions may be affected in addition to fund marks such as reporting, information technology platforms to handle pricing fees, and the potential use of service providers in the valuation process. This chapter provides an overview of the private equity valuation landscape and considerations that LPs must consider in approaching the private equity fund valuation process.

LIMITED PARTNER DISTINCTION BETWEEN FUND LEVEL AND PORTFOLIO COMPANY VALUATION APPROACHES

Investors performing operational due diligence on a private equity fund can approach the subject of valuation from two different regards. The first such consideration regarding valuation is the way in which the private equity firm will calculate a value for the portfolio itself. This valuation is utilized ...

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