How much do *really* you rely on DCF in PE?
I work in a credit shop and we usually undertake valuation analysis when lending against the total EV of the borrower, which in the last 5 years has been the only security we would get. We mostly used multiples and also we normally carry out a DCF that's just really an extension of our 3-statement model with some boiler plate WACC assumption, but no one spends really any time on it. Multiples is how we look at it. I personally think that a DCF is something silly enough to base an investment decision on, since it requires so many assumptions (a lot far in the future too) that you can probably fare better by picking a number out of a hat. So I ask you, PE guys, do you actually really value DCF outputs?
I think modelling is very useful to understand drivers and communicate their impact on perfomance, but the output itself is neither here nor there. How do you guys do in the industry?
I understand multiples are a shorthand for DCF (arguably a DCF with no transparency on inputs) but it is the only observable variable we have to go off.
We use a DCF for our quarterly valuations, but other than that, almost never. I've maybe used a DCF once to value the strike price on some rescue convertible debt we put into one of our companies, but for regular investments valuations we'll just run a LBO and make sure the multiple makes sense for the industry
Virtually never
We use the DCF when the company is doing shit so that we can maintain our mark.
Whats a DCF
oh man
edit: meant it in a "I know that feeling" way
Seconding the above - never. It's a multiples business and DCF is only used to mark our portfolio companies for quarterly valuations / fundraising decks.
All the time, but I'm in infra PE where we're looking at hard assets with contracted/predictable cash flows, so different from a typical multiple-driven valuation approach that you'd see in vanilla LBO PE. Just wanted to add my 2c for the infra guys - DCF is life when you're in infra!
I spent some time beside the infra team and makes total sense, cash flows are much more certain and there are a lot less flimsy assumptions involved.
It's moreso because a lot of Infra assets have de minimis reversionary value. Whether due to useful life restrictions or the asset being on a ground lease, you typically value the asset according to cash flows over the useful life because those cash flows are finite versus operating companies with perpetual growth and operating potential. It's the same reason in RE the only time I've used a DCF is for ground lease assets because you can't use the same cap rate you would use for a fee simple property that one can hold into perpetuity.
Loser
We will sometimes do a "next buyer LBO" model if we are buying a transitional asset or building something through M&A that needs time to mature. On a long enough timeframe an LBO model and a DCF obviously converge to the same thing.
Well to be fair an LBO model is technically a DCF…
I work at a ~$1B credit shop (that also does equity co-invests) and we also only use DCFs for our quarterly equity valuations. I don't think a PE shop has ever even sent us a DCF either, multiples are the way to go.
exclusively use arr and ebitda comps
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