Please delete if this is too much of a replica, but I feel in all of the old threads, there was never any solid advice from someone who had had an interview / case study recently.
I am a 2nd year BB IBD analyst who has an interview with a secondaries fund next week. Description is "valuing an LP's stake in a fund - no prior experience assumed - just want to see how you think."
Anyone had one of these recently and would be so kind as to give me some pointers / tips ?
Things to think about:
(1) sum of values of the various portfolio companies (using NAV as a benchmark and then checking comps to adjust if necessary). I know of no secondaries shops that actually use DCF on basic transactions. For bigger stuff sure. (2) understanding where the interests have traded in the past (asking brokers) (3) understanding exit timing. This affects the discount that you'll put on it. If you expect most cash back over the next couple years, a smaller discount will be applied than if you have real exits in sight.
I assume you've got experience with (1), but don't forget (2) and (3) just because they aren't textbook answers or what you do day-to-day in banking. (2) and (3) are how the guys actually bid on secondaries. I've seen guys bid valuing certain portfolio companies at 100% of NAV because they know that the company is already in a definitive merger agreement.
Also think about blind pool risk, J-curve, fees, rights, manager quality, etc. With the exception of fees, hard to quantify the risk, but very important.
Thanks so much - that is really helpful! Just quickly - when you say to look at where interests have traded in the past, do you mean the portfolio companies pre-acquisition? Or the entire LP's interest if it has been sold before?
The entire LP interest if it has been sold before.
Take note of size though. Smaller pieces get lower bids as a % of NAV versus a big multi-million dollar trade where its worth the time to understand the assets.
This is pretty bad advice. I've worked at two secondary firms, and know others and have interviewed at others, and they all do DCF. It's all about projecting cash flows and discounting based on your required return to get a price. Also each company is projecting a FCF - it may not be extremely complicated, but its done for each company.
I would also never use the answer in an interview "ask a broker". What a broker tells you is meaningless.
What size deals do you build DCF models on? I'd mostly only seen IRR / MOIC to begin with.
To be noted - you can ask different brokers, not the guy who is trying to sell it to you.
Knowing where things have transacted in the past is very valuable. If you think it's worth 70% of NAV, do you bid at 70% of NAV? No. You bid as low as you think that you can get away with while still winning the transaction. Valuation is useful for creating an upper bound to where you'd bid. Market data helps create a lower bound.
So to value an LP interest, an analyst would have to: 1) take a look at the underlying portfolio companies and use the quarterly financials provided by GPs to create a DCF for each company, essentially using the provided information/financials/research to project out the financials into the future. 2) use a comp set to determine the TEV/EBITDA at exit, get the EV, back-out the exit equity value. 3) use the desired IRR/multiple return based on the specific risk profile of the company to come to the purchase price of the equity of the portfolio company now. 4) repeat this process for all portfolio firms and aggregate the equity values. 5) look at the % ownership of the LP interest in the fund as a whole and apply that % to the aggregate equity value to arrive at the vale of the LP interest. 6) The management fees and carry would be calculated at the fund level, meaning the aggregate FCF of all of the portfolio companies.
Is this a correct summary of the process of valuing an LP interest? Please correct me if I am wrong or missing a step.
Also, I know that people usually express the purchase of the LP interest as a % of NAV. So, the price the secondaries firm pays would be calculated as listed above, but what about the total NAV? We essentially calculate a NAV for each portfolio company, so is it the total equity value of all of the portfolio companies? Is the difference coming from the discount applied to the valuation based on the secondary fund's classification of risk/discount applied in Step 3?
Hi m8, would you mind explaining how they do a dcf? My understanding is that they would only receive the quarterly reports from the GP and there often information isn't enough detailed eg. ownership information could be missing. How are they supposed to compute a WACC for all entities? Is there a quick way?
Okay, I have to disagree with you pretty firmly. I've been in the secondaries industry for a long time and you flat out can't say DCF is used all the time. A lot of transactions do not provide company level granularity as you're just given a quarterly report. If you are working on single company deals (directs) or GP led transactions for buyout stage companies then a DCF should be possible but it definitely IS NOT the standard valuation metric for plain vanilla LP secondaries.
I have a similar case study could you help? willing to pay
Can anyone please shoot over case studies for secondaries interviews to get a sense of the structure / format
Grazie Mille
Would you mind sending any of those my way?
bump
bump on the case study Q
PM me the fund. been through a few myself and have a good sense. to be fair, a lot of the cases are different across GPs so understanding the firm would help me help you
If anyone is sending around case studies I would incredibly appreciate it if someone could send one my way
Did you happen to get a case study? If so, mind sending it to me as well?
Hello, commenting to request for a fund case study too. I've found a couple on Thank you in advance.
Hi, would you be willing to send over my way would really appreciate any input or help on LP stakes
Paper value is not liquidation value. Maybe adjust for a slight discount because LPs don't liquidate early fo nuffin.
I'd add that if the fund we're talking about is a VC, then underwrite it to as the handful that returns 80%. Everything else is 0.
Bookmarked
I have two which I am willing to share / trade. Would be great to see some others.
Hi - would be great to see these if possible? Thank you in advance
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