Valuation for Private Equity

Private Equity

Large quantum of equity coming from a single pool of funds

Equity is unlisted, not traded Angel investors Venture capital (VC) firms Private equity firms Scale of investment varies

Venture Capital (VC) Method of Valuation

Valuation used by angel, VC, and private equity investors

Determines equity stake percentage for a given amount of equity provided

Not as detailed as discounted cash flow (DCF)

Investment Period

Period for which VC invests moneyTypically 3-7 yearsAt the end of this period VC wants to

exit

Investment Amount

Total capital required determined based on initial investment required plus burn rate till business generates positive cash flow

Investment required from VC is total capital required minus Capital raised through debt Capital raised through other equity sources

• Promoters and FFF (friends, family, and fools)

Exit Valuation

Value of company at the time VC wants to exit

Based on multipliers on EAT or revenue projections at time of planned exit

10 X EAT 1 X revenue This gives total firm value

Equity plus debt Equity value at exit is total firm value

minus debt

IRR Expected by VC

VC expects an IRR on investment much higher than normal cost of capital

Higher IRR to compensate for high risk being taken by VC

Typically VC expects IRR of 50%

Valuation and VC’s Stake

POST: post-money valuation Present value of equity after investment made

by VC INV: investment made by VC PRE: pre-money valuation

Present value of equity before investment made by VC

POST determined by discounting equity value at exit by VC’s IRR

PRE = POST – INV VC’s stake = INV / POST