Study Session 13 - Private Equity Valuation Flashcards
LBO model inputs
1- The target company’s forecasted cash flow
2- The expected returns to the providers of financing
3- The total amount of financing
Private equity valuation methodologies
DCF Relative value or market approach (multiple) real option analysis replacement cost venture capital method leveraged buyout method
Exit value
investment cost \+ earning growth \+ increase in price multiple \+ reduction in debt
component of the LBO return
return on the preference shares for the PE firm
the increased multiple upon exit
the reduction in the debt claim
Post-money valuation and ownership proportion of the venture capital
pre-money + investment = post-money
post= PV(exit value)
investment/post-money
Hurdle rate
is the IRR (so the anualized rate) that the fund must mert before the GP can receive carried interest
Gross vs Net IRR in private equity
Gross IRR reflects the fund’s ability to generate a return from a portfolio and is the relevant measure for the cash flows between the fund and the portfolio companies
Net IRR: net of management fees, carried interest, and other compensation. Relevant measure for CF between fund and LPs
PIC (paid-in capital)
Capital utilized by the GP
DPI (Distributed to paid-in capital)
LP’s realized return and is the cumulative distributions paid to the LPs/cumulative invested capital
Residualvalue to paid-in capital
LPs unrealized return
Carried interest is furst paid when…
the NAV before distribution exceeds the committed capital
NAV before distribution
NAV after distributions in prior year \+ capital called down - management fees \+ operating result
Carried interest calculation
%carried interest * the increase in the NAV before distribution
DPI calculation
cumulative distribution/paid-in capital
RVPI calculation
NAV after distribution / paid-in capital
