Pre - IPO Valuation Question

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?

 

^^^ 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.

 

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.

 
Best Response

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.

 

Minima omnis accusamus non in repudiandae recusandae facilis adipisci. Corporis rerum porro enim optio voluptate. Totam facere est et quia. Dolorem cupiditate molestiae consequatur aut voluptates quasi. Officiis autem sed est vel.

Career Advancement Opportunities

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Warburg Pincus 99.0%
  • Blackstone Group 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

March 2024 Private Equity

  • Principal (9) $653
  • Director/MD (21) $586
  • Vice President (90) $363
  • 3rd+ Year Associate (88) $280
  • 2nd Year Associate (204) $268
  • 1st Year Associate (385) $229
  • 3rd+ Year Analyst (28) $157
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (245) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (313) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
dosk17's picture
dosk17
98.9
5
GameTheory's picture
GameTheory
98.9
6
Secyh62's picture
Secyh62
98.9
7
CompBanker's picture
CompBanker
98.9
8
kanon's picture
kanon
98.9
9
pudding's picture
pudding
98.8
10
bolo up's picture
bolo up
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”