I have a valuation question her and would greatly appreciate some advice!
The business I work (say ABC co) invested $1m into a cash-desperate pre-IPO company through a convertible loan (no coupons & not secured). Upon IPO, which is expected in 6 months, the loan is compulsorily convertible to shares at 50% discount to the IPO price (whatever the IPO price). In the case of the IPO not being successful, ABC will required to redeem the loan at 50% interest in 1 year.
Now its year end and I need to value ABC’s $1m investment but I can’t seem to see the best way to value this as neither of the common valuation techniques are applicable.
In essence the value can either be $2m at IPO (given 50% IPO discount) or $1.5m in 12 months if the IPO is not success and ABC redeem the loan; or zero if the pre-IPO company liquidates at any time between these events.
Any ideas?
I'd assign probabilities to each event and do a weighted average. If there were more inputs (share price after IPO, maybe) and I felt comfortable assigning probabilities to them, I'd run some simulations and see what it spits out.
^^^ agree with above. There's 3 scenarios 1) $0 2) 1.5M in 12 months 3) IPO at xxx
Within #3, i would say there is 3a-3c where share price could be down, even, or up. Assign probabilities to all 3, and probabilities to the other 2, discount them to present, and weight them by the probability.
Student here, so please excuse the potentially basic question. Curious to see how one would figure out the probabilities of such events? What type of technique is used to find these probabilities?
Comparable companies typically. You would find similarly sized companies that IPO'd recently in a similar marketplace and compare financials using a multiples approach. You'd essentially build out a table of potential values based on a Black-Scholes model and then run a series of simulations for expected values. All of this is just within #3 though, you'd also need to evaluate the likelihood of 1-2.
That makes sense. Would you use the same approach with scenarios 1-2? (ex. find companies that liquidate before they are schedule to IPO/find companies that debt holders didn't convert and find the percentage of companies that chose these approaches as your probability)
I don't think a reasonable dataset for that would be likely to exist. What's more likely is an evaluation of the likely financial results, and then an evaluation of whether or not it would be favorable for debt holders to convert (i.e. the option is "in the money"). As far as evaluating the likelihood of forecasted outcomes, I think that comes down to proprietary information at that particular firm, as it's a function of economic/industry outlook. It gets pretty subjective at that point and it's really not that uncommon for multiple banks/valuation specialists to get wildly different values as a result.
Another area of subjectivity actually ends up being the comparable entities, since the performance of those is more or less a function of their Beta from what I recall.
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