Private equity investments, especially through warehoused investments, have become an increasingly popular asset class for investors seeking higher returns. However, valuing private equity investments can be challenging due to lack of public information. This article will analyze key valuation methods for warehoused private equity investments and factors impacting their share prices.
Cash Flow Analysis Critical for Private Equity Valuation
As private companies do not trade publicly, private equity valuations rely heavily on discounted cash flow analysis. Forecasting revenue growth, profit margins and capital expenditures is key for estimating future cash flows. Higher expected growth and profitability support higher valuations and share prices.
Comparable Company Analysis Can Benchmark Value
Though inexact, public company multiples can provide valuation benchmarks. Comparing revenue, EBITDA or earnings multiples to industry peers can guide private equity valuation ranges. However, adjustments for size, growth outlook and illiquidity are required.
Precedent Transaction Analysis Dependent on Data Availability
Valuations can also be based on recent M&A deals for comparable companies. However, private equity lacks the rich data of public markets. Transaction details may be undisclosed and sample sizes small, limiting analysis.
Liquidity Discounts and Control Premiums Critical
As private equity stakes lack marketability, valuations apply liquidity discounts. However, large majority or control stakes warrant control premiums. Both significantly impact share price and must be carefully evaluated.
Private equity valuation is as much art as science. Cash flow projections, industry comparisons and precedent deals help estimate value ranges. But ultimately, share prices depend on the negotiating leverage between buyers and sellers.