When a firm wants to make a minority investment in say a private company, do you just take %ownership of target's DCF valuation? So if A wants to make 20% minority investment in B and B is worth $X Million according to DCF model, you just do 20% of DCF?
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If the company has any net debt, you deduct that amount from the DCF valuation (which is the EV assuming you're looking at Unlevered FCF), and then do 20% of the remaining equity value
Wouldn't you invest 20% based off of their balance sheet? The 20% means the amount of influence over managerial decision-making, i.e. 20% of equity. So if a company has $100 assets, $40 Liabilities, $60 Equity... you would need to buy up $12 of the equity to have a 20% investment in that company.... right?
Yes, that's right. To use your example - theoretically, the DCF gives you the value of the Assets of the company ($100) if you discount unlevered FCF (Liabilities + Equity, which is a proxy for EV in very simple terms). So you would deduct the net debt ("Liabilities" of $40), which would give you the equity value ($100 - $40 = $60, i.e. your "Equity"), and then multiply that by 20%.
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