Private Equity Valuation

WBS Business Solutions

Private Equity Valuation

Private equity is of increasing importance in the global economy. Private equity firms make investments in early stage companies like Angel Investors , Pre-Seed, Series A,B,C,D,E (called a venture capital investment) to investments in mature companies like Acquisition , Management Buyout(MBO),Leverage Buyout generally in a buyout transaction.

We will use the term portfolio company to denote the companies that private equity firms will invest in. Portfolio companies are sometimes referred to as investee companies. 

We will use the term private equity firm (PE firm) to denote the intermediary Party. We will use the term private equity investor to denote the outside investor who makes an investment in a fund offered by the PE firm.

When we will do the investment, we should examine the perspective of both private equity firms evaluating investments in portfolio companies and the perspective of an outside investor who is evaluating an investment in a private equity firm.

It is commonly believed that PE firms have the ability to add greater value to their portfolio companies than do publicly governed firms.

The sources of this increased value are thought to come from applying the following process:
  1. The ability to re-engineer the portfolio company and operate it more efficiently.
  2. The ability to obtain debt financing on more advantageous terms.
  3. Superior alignment of interests between management and private equity ownership.
Venture capital and buyout are the two main forms of private equity investments. Companies financed with venture capital are usually less mature than buyout targets. Venture capital firms usually have a specific industry focus, such as biotechnology, and emphasize revenue growth. When private equity firms make buyout purchases, the emphasis is on EBIT or EBITDA growth, and typically a portfolio of companies with stable earnings growth is purchased.
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