PE reality check - how do you really derive valuations?
Hey everyone,
We obviously all understand how a LBO technically works but simultaneously every model is only as good as the underlying assumptions (bullshit in, bullshit out)
Given I work in PC, everything we do has some kind of safety net as we do not have to derive the ultimate value / price but rather just check if there is broadly sufficient headroom for debt service. Hence I’m quite curious how PE’s ultimately derive their valuation and also their business plan assumptions in reality.
Valuation: Do you basically know from day one (comparables / based on your partner’s input) what that company is worth and kind of reverse engineer the model to justify the price or do you really put lots of time into the LBO to find your price?
Business plan: Do you just take the Mgmt Case and tweak it here and there or do you really spend lots of hours on this to finetune your sponsor case?
Some people might laugh about the question but I find it genuinely interesting as real life often is very different from theory.
Thanks!
It is a rigorous process with several checks and balances to ensure we are appropriately marking to market — public market rigor applied to private assets.
At acquisition it's basically industry comps adjusted for company-specific nuances. Like you said, you generally know what you're going to bid after you read the book and maybe talk to some bankers, then you see if the LBO backs it up or if your partner really wants to do the deal you make the LBO work.
In terms of business plan/model we'll have multiple cases. Usually management case is the "upside" case, then a haircut underwriting case that's more rigorous and then a downside case (+/- a few more cases if partner wants to see different things).
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