2.3 PE KPIs and Valuation

Question 1

Expand on the different valuation approaches (based on a business plan)

1. market approaches: based on ….
2. cost approaches: …
3. Future income approaches:

Answer 1

1, previous transactions, financial trading multiples, industry valuation benchmarks

2. Liquidation/ NET assets
3. DCF from investments/underlying business

Question 2

IRR is one of the main measures of performance.

IRR measures the …, including any additional equity contributions made, or …

▪ Discount rate that must be applied to … in order to produce a net present value of zero

→ IRR is the equivalent constant interest rate during the life of the investment

Answer 2

total return on a PE firm‘s equity investment;
dividends received during the investment horizon

the sponsor‘s total cash flows over the investment horizon

Question 3

State and explain the pros and cons of IRR as a measure of performance.

One con is: Ignoring size of cashflows might lead to faulty decisions (comparability)

Answer 3

Pros: considers all cash flows; considers the time value of money

Cons: Doesn’t consider risk; high sensitivity of calculation due to timing of cash flows, complex arithmetics in more than 2 periods,

Question 4

Return multiples is another main measure of performance.

▪ Popular way of … in private markets

▪ Computed by…
→ Proceeds over investment

▪ General formula:
Multiple = returns from the investment/ invested money

▪ Usually, three multiples are reported:
▪ Distributed value to paid-in ratio (DVPI) ▪ Residual value to paid-in ratio (RVPI)
▪ Total value to paid-in ratio (TVPI)

Answer 4

assessing performance

dividing the value of the returns from the investment by the investment amount

Question 5

State the pros and cons of return multiple as a performance measure.

Answer 5

Pro: Easy to calculate and interpret

Cons: Time value of money ignored, Risk not captured