Valuing Private Equity

The following excerpts are from Jennifer Hughes, A magical mystery tour over private equity valuations, FT.com, Dec. 4, 2008:

How can you value a private equity investment? Let me count the ways.

Or rather, let the industry come up with the answers as that is exactly what groups are struggling to do now as they face year-end reports to investors.

Like other sectors facing valuation issues, the discussions have centred around “fair value”, or the use of market prices where possible. In the private equity universe, this isn’t that often. Without market prices, the firms then descend through a sliding scale of measuring systems. * * *

Any valuation involves making assumptions about cash flows, primarily based on revenues. With the economy falling rapidly into a worse downturn than had been expected just a couple of months ago, it has become harder to weigh up what is truly an unlikely Armageddon scenario and what is actually reasonable. * * *

Worried private equity investors, like their counterparts in listed companies, are demanding more explanation of the assumptions behind the final number. Any company or investment firm would be wise to produce as much as they can – and as clearly as they can – to help alleviate the jitters.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.