What’s up with PE valuations?
Every time I review a PE portco valuation there is something wrong. Either the assumptions are inconsistent, aggressive, or just don’t hold water. When I get on calls with these folks their egos are incredible. They get so defensive about their assumptions and immediately start calling into question the validity of my concerns. Not to mention they love to obfuscate their math or backselect mults to match up with what they need. It’s not transparent and quite shady imo.
Why does smaller PE not have any emphasis on sound valuation practices or hire back office folks to do appraisals in-house?
Smh… 🤣
lol are you an auditor or something, just do as you're told and approve it.
Agree - get back in your corner
You’re just proving me right by being defensive and dismissive, goes to show 🤣
The white-collar “just put the fries in the bag, man.”
Love the attitude
Lol
“Why don’t PE funds make their valuations smaller” is what you’re asking? Seriously?
Yeah, you’re supposed to ask your “smart” questions to say you did it. And then, you listen to the VP be an asshole to you, and say “management has sufficient conviction” and be done with it. Wtf else they paying you for?
i feel like what he is asking is more "why don't they truly mark to market" albeit everyones definition of market is very different so he asked somewhat of a smart question albeit in a dumb way.
99.99% of firms are holding portcos at higher valuations then they should be, and everyone knows this, the data is fairly empirical, there are minimal exits occurring, the most common exit over the last 24 months has been the CV route so that tells you the appetite to pay what firms are asking... however there really is no solution to this, IRR matters for fundraising so firms are not going to hold things at a more ethical valuation.
I think you see the same in property markets too.
The ultimate piece is - if you can’t sell at the valuation, as long as you can convince a financier to keep financing you, you can just keep the ball rolling until it doesn’t. (And just plopped the thing in a continuation vehicle saying market isn’t good)
Hold on for a minute. The only thing the data shows is the opposite - when PE firms sell, it is with at a higher price than what was in the books - on average. Let’s see 2021 investments play out, but that the evidence we have.
That funds also smooth out returns during the ownership period is a different story.
The emperor has no clothes, so let's find some rags and all act as if it were loro piana.
Wait, what about DPI?
- Hmmm.... Good one. Let me see, I'll check and be right back with ya (slowly disappearing)
Everyone being a dick here should be ashamed of yourself. Anyway there is no 5D chess here. Valuations are inflated so the fund looks like it’s doing better, and also sometimes because the LP docs have things in there that matter like dollar flows that depend on marks.
seems like I hit a nerve or something
because it's not a science and your opinion is as good as mine and because they are your client, then less reasons to challenge it. At this point, don't even need to see models, so we can save headcount costs. This my ideal world:
PE: "Hey, get us a loan, we buying a HVAC company in Israel close to Gaza"
Bank: "Yes, chief, its on the way"
PE: "Thx. Stay in touch for the next "L" in the LBO.
Bank: "But can I ask what's the thesis at least, etc."
PE: "No thesis. Economy just goes up, so you're safe"
Bank: "bet, take care"
60% finance jobs wiped out
and because I assumed u may be in credit, if a PE investins in ABC company, they are the first to get a hit on their equity and have their value wiped out, so never quite understood the paranoia of lenders. If you the PE thinks it makes sense from a risk perspective - unless we are getting 95% leverage - then plz no questions
Bank does not have the ability to make 5x its money on another deal to offset losses
Bc asymmetric risk bro lenders can’t make 5x on their money 😭
Fewer reasons* watch your grammar, please.
No way you’ve been in finance for >1 year; “they are the first to get a hit on their equity and have their value wiped out…” is just egregious. And you think the play book these days is just wipe jobs for returns
That said OP, the reason intra-hold valuation isn’t respected is that the real metric is distribution of capital. Gives private market investing some job security
so ur challenging my idea that equity is the first side of the RHS to get hit by losses. ok chief, you do you
Totally agree, client would never say this though and instead plays coy “not understanding” my questions while also trying to say I’m wrong. Leaving such a bad taste
I think LP-led buyout secondary pricing is a decent sanity check on NAV. Last time I checked I think stuff is selling at around 90-95%, so I don't think there's a major problem going on.
I would subtract 3-4% of that, majority of LP stakes are going into large act 40act/evergreen funds which need to put cash to work as quickly as possible or else they suffer cash drag, so they are incentivized to deploy faster paying more
completely agree.
Not really, these funds just slap leverage on their investments and want to raise the next $30b fund...
If buying LP-interests in a later life fund, releveraging makes plenty of sense. Secondaries as an asset class have done pretty well. But whatever, keep your clients underweight alts so you can keep the fees for yourself i guess.
Campell L, put out data from 2024 evergreen funds on avg had 3-4% higher prices than closed end funds on LP stakes.
Welcome to the wonderful world of "it's worth what I say it's worth now shut the fuck up and do what you're told CPA boi".
Everyone knows the valuations are quite high
LPs are in on it as well, just chill bro
Lmao at my MF me and the VP just ask the partner what he wants the valuation to be this quarter and then we back into it with our adjustments. Valuation is always gonna be made up until someone actually buys something
Literally the exact same approach at my MF
What I did at my prior shop too lol
Please do share your views on valuations - I’m sure we can all learn something from you oh mighty auditor!
Concerning comments in this thread. Like the music has stopped but people keep dancing
Everyone point and laugh
Question...if PE has an asset marked at 2x, and gets a bid that would crystalize less than 2x but maybe north of 1.5x, do they hit the bid or hold onto it?
Would definitely consider where DPI stands. If you’re six or more years in and sitting at less than 0.5x returned to LPs, might be worth starting to get closer to a 1x and getting into the carry. If you’re comfortably at a 1x DPI with more than 0.5x residual then maybe worth waiting to crystallize your marks in a better environment. But if it looks like the best deal the company could get then that would trump strategizing j curve dynamics.
Depends on if there's fundraising within 12-24 months. If there is - absolutely not. Because it will call into question ALL of the funds IRR
_
We’re in the arena bro
dont comment on valuations js sit in your corner and do as you're told bro
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