I was looking through an investment memo by Jefferies for the private equity market. In the secondary market, secondary's were trading at around 85%-90% NAV. 

I'm not too familiar with private equity calculations and was hoping someone could clarify how NAV is calculated for private companies. Since prices aren't marked to market the NAV calculation doesn't seem quite as simple for private companies. Here's what I was able to find online but am not entirely confident. Let me know if this is correct or not.

NAV = (Assets - Liabilities)/Outstanding Shares

Since there's less liquidity in PE, we would have to make assumptions about the assets in the investment.

1.) We would use comps, precedent transactions, DCF's, etc. to find the value of the investment at each point in time. 

2.) We would then find the equity value. Enterprise Value - Debt + Cash = Equity Value.

3.) Equity Value / Outstanding Shares

Does this seem to be correct or was my information wrong? Not too much online for PE calculations just open end fund calculations. Thanks for your help.

Comments (10)

Sep 10, 2021 - 1:11am
franco, what's your opinion? Comment below:

Happy to provide some thoughts on this. In general the NAV represents the value of the underlying assets (typically valued using some comp set in the way you describe) less costs that are incurred at the fund level (accrued carry being a major one).

From here it sort of depends what your interest is e.g. are you interested in purchasing secondary fund positions?

Note: I used the term assets here to mean portfolio companies (not balance sheet).

Most Helpful
Sep 10, 2021 - 10:57am
MidtownParkAve, what's your opinion? Comment below:

Here's the dirty secret in PE - they get to mark their own NAV (using standard, vanilla valuation methods). Sure they pay some accounting firm to sign off once a year, but it's highly subjective, and you can bet a third-party attestor is getting a heavy nudge.  That's why you'll still see some fake positive equity return on a portco to LPs when its debt is trading in the 80s.  

  • Analyst 1 in PE - Other
Sep 10, 2021 - 11:48am

Great Response, thank you! So is the NAV based on the underlying assets of the portfolio company?

Sep 11, 2021 - 7:15am
tacobellking, what's your opinion? Comment below:

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