How do LMM PE shops value assets?

Based on the most helpful WSO content, valuing assets in LMM PE shops can indeed involve precedent transactions and trading comps, but there are nuances due to the size and maturity of the businesses involved. Here's a breakdown of the valuation methods and target returns:

1. Valuation Methods:

   • Precedent Transactions: LMM PE firms often look at past transactions within the same industry to gauge market valuations. However, adjustments are usually necessary to account for differences in size and growth potential.
   • Trading Comps: While larger firms might rely heavily on trading comps, LMM PE shops might use them with caution due to the disparity in scale and operational maturity between the companies they are evaluating and those listed on public markets.
   • Discounted Cash Flows (DCF): This method might be more prevalent in LMM PE due to the specific growth projections and operational improvements that can be forecasted with the firm's involvement.
   • Asset-Based Valuation: In cases where businesses have significant tangible assets, this method might also be employed.

2. Target Returns:

   • LMM PE firms generally target higher returns to compensate for the increased risk and intensive operational involvement. Returns of 30% or more are not uncommon, reflecting the execution risk and the value added through strategic improvements and professionalization.

Each LMM PE firm might have a slightly different approach depending on their specific strategy and the industry focus. The key is to understand how these methods are adapted to fit the smaller scale and unique challenges of LMM investments.

Sources: How to tell the prestige of LMM or MM PE firms?, LMM PE compensation, recruiting and port co. work, LMM Business Owners?, LMM PE Associate Experience - What is it REALLY like?, What kind of questions can be asked about precedent transaction