A Note on Valuation in Private Equity HBS

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A Note on Valuation in Private Equity
Valuation is a vital process that evaluates the value of an asset useful in analyzing investments and in financial reporting among others. Valuation methods have implications for private equity practice, but some approaches can lead to better decision making in investment when reasonable assumptions are made.
The first is the Discounted Cash Flow method which has two approaches namely: CCF (Capital Cash Flows) and WACC (Weighted Average Cost of Capital) (Goppers 1). This method first determines unbiased cash flows from operations which are independent of the o’s capital structure. A common mistake made in the above process is when interest payments are removed from the cash flows and referred to as the ‘cash flow’ to equity holders. In addition, this method does not allow the calculation of a firm’s value independent of financing.
The next is the LBO Valuation models where an equity investment is projected upfront via an IRR (Internal Rate of Return) analysis. Afterwards, its growth and sale is projected at and exit multiple or factor. The IRR of these entry and exit values is then compared to the firm’s required rate of return.
Third is Multiples Valuation Methodology which entails finding a comparable company that is analogous to the company to be valued. Multiples for the benchmark company are calculated and then applied to the company to be evaluated.
The practicality of each of the above methods can be evaluated using an accurate comparable company’s valuation.

A company’s issue at hand is what will ultimately determine which framework to use in any form of analysis.

Works Cited
Paul, Gompers. “A Note on Valuation in Private Equity.” Harvard Business School,
2015.