Valuation of Private Equity Investments (EVCA)

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EENTDREPURENECURSAHIPTEDIUOCATNION COCURSOE •U MORDUSLEE3
VALUATION OF PRIVATE EQUITY INVESTMENTS
Alexander P. Groh

CONTENTS
ESTMENTS
CONTENTS
1 Introduction 5
2 The role of the investment analyst 6
3 The purpose of valuation 7
4 Fundamentals of valuation 8
4.1 Calculating future values and present values
of cash flows 8
4.2 Valuing cash flow streams 9
4.2.1 Discount rate assumptions 9
4.2.2 Continuing value 10
4.3 Perpetuities 10
5 Approaches to valuation 11
5.1 Discounted Cash Flow (DCF) valuation 11
5.1.1 Enterprise, WACC or Cash Flows to
Entity valuation 12
5.1.2 Cash Flows to Equity valuation 15
5.1.3 Adjusted Present Value (APV) method 16
5.2 Multiples valuation 17
5.2.1 Price/earnings (PE) multiple 18
5.2.2 Price/book value (PBV) multiple 19
5.2.3 Price/sales (PS) multiple 20
5.3 Real Options valuation 21
6 Summary 22
7 Appendix: further reading 23
Note: throughout this module, we have used the pronouns
‘he’ and ‘his’ to refer to persons of either sex.