Private Equity Valuation Methods

Mar 15, 2022

Private Equity Valuation Methods

Private equity firms invest in privately-held companies with the goal of generating a return on their investment. Valuing these companies can be challenging, as they are not publicly traded and therefore do not have a readily available market price.

There are several methods that private equity firms use to value their investments, including:

Discounted Cash Flow (DCF) Analysis

DCF analysis is a common valuation method used by private equity firms. This method involves estimating the future cash flows of a company and discounting them back to their present value using a discount rate. The discount rate is typically based on the risk associated with the investment.

Market Multiple Analysis

Market multiple analysis involves comparing the valuation of a company to the valuations of similar companies in the same industry. This is typically done by comparing metrics like price-to-earnings ratios, price-to-sales ratios, and enterprise value-to-revenue ratios. Private equity firms can use this method to determine whether a company is undervalued or overvalued relative to its peers.

Net Asset Value (NAV) Analysis

NAV analysis involves valuing a company based on the value of its assets minus the value of its liabilities. This method is commonly used for companies that hold a significant amount of assets, such as real estate or infrastructure.

Comparable Transactions Analysis

Comparable transactions analysis involves looking at the valuations of similar companies that have been sold or acquired in the past. Private equity firms can use this method to determine what other investors have been willing to pay for similar companies.