Hi,
does anyone know if private debt funds are concerned about general valuations?
I read somewhere that some credit investments can be linked to equity/enterprise value? Or is there any topic where Credit Investors are concerned or interested in valuation (e.g. multiples)? Do they calculate equity/enterprise values in specific investments?
Thank you!
Best.
From my experience, which is more on the direct lending side as opposed to special sits / credit opportunities, valuation is important but not a lot of valuation work is really done. Typically, diligence is piggy-backing off the package (financial due diligence, commercial due diligence etc.) that the equity sponsor provides and also what their bid is. So you get a sense of the multiple that way, and certainly can take a view based on comps. Ultimately, what is important is the equity cushion. Have to be comfortable that if equity is squeezed, your value is still protected.
Hi Sutari93, I'm considering joining a DL/Private Credit analyst program and was hoping that we could chat privately. Could you DM me? My account is new.
Yes, private debt investors are absolutely concerned with a company's valuation but they don't necessarily directly participate in the buyer and seller's negotiations to determine the company's actual valuation during a transaction. Indirectly, how much leverage lenders are willing to put on a business influences valuation. Most critical to private debt investors is getting their money back in full, which takes priority in the proceeds waterfall. However, equity cushion is important and generally speaking direct lenders like to see Loan to Values 60-65%. Comps are an important part of diligence and lenders want to understand where a Company’s purchase multiple falls relative to market. If a buyer is overpaying, that could put their principal at risk if that multiple isn’t sustainable when the buyer ultimately sells the business. If a buyer is underpaying, it could imply there are business risks that warrant said discount.
What do you mean by linked to EV? Would be helpful if you can elaborate. I’m in direct lending and we track valuation internally for reporting/risk management (usually using comps and sometimes third party for our asset management reporting needs). Like others say, lenders care about the equity cushion below in the equity structure.
When you say linked to EV do you mean the loan is in default below a valuation? What valuation do you use as there is no market/liquidity? There won’t be valuation unless there is a transaction/liquidity event.
Thank you guys.
I have an offer for a PD shop which invests across the cap. structure (senior, junior, mezzanine and equity) and does LBO financing. I am really interested in modelling and valuation stuff, so I don‘t really know what to expect from this role.
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