Learn how to reconcile differing asset valuations with expert tips for private equity professionals navigating complex investment landscapes.

Beyond experience/practice, I’ve found Michael Mauboussin’s Base Rates paper to be incredibly useful in determining the reasonableness of the revenue growth rate assumption. History doesn’t repeat but it often rhymes and a histogram of growth rates off of a particular base (market cap) is a superb starting point. Put another way, the base rates paper helps one assess the likelihood/reasonableness of the assumed revenue growth rate.

Last updated on Jul 19, 2024

You're facing conflicting asset valuations. How do you navigate the differing perspectives?

In private equity, you often encounter scenarios where asset valuations differ, leaving you to navigate through these conflicting perspectives. The challenge is to reconcile these differences to make informed investment decisions. This process involves understanding the underlying assumptions, methodologies, and market conditions that contribute to the variation in valuations. It's a complex task that requires a blend of financial acumen, experience, and sometimes, a bit of negotiation.

1 Understand Basics

To navigate conflicting asset valuations, start by understanding the basics of valuation itself. Valuation is the process of determining the present value of an asset or company. In private equity, this often involves methods like discounted cash flow (DCF) analysis, which forecasts future cash flows and discounts them back to present value using a required rate of return. When you encounter different valuations, scrutinize the inputs and assumptions such as growth rates, discount rates, and terminal values. A clear grasp of these variables is crucial for identifying why valuations diverge.

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Tod Schneider

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Beyond experience/practice, I’ve found Michael Mauboussin’s Base Rates paper to be incredibly useful in determining the reasonableness of the revenue growth rate assumption. History doesn’t repeat but it often rhymes and a histogram of growth rates off of a particular base (market cap) is a superb starting point. Put another way, the base rates paper helps one assess the likelihood/reasonableness of the assumed revenue growth rate.

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Fiona Hotston Moore Expert Business Valuer and Non-Executive Director

Forensic accountant/expert witness/business valuer (NED), SID, Audit Chair. Exec roles: Forensic Accountant. GAAP, audit & C-Suite. FORENSIC AND VALUATION ENQUIRIES: Fiona@fhmforensic.co.uk M:07770 642491
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Valuation is inherently subjective and a valuation experts applies both science and art in arriving at a valuation. Looking at more than one valuation methodology is valuable even if only to sense check your preferred method. The key is to outline the key assumptions and the impact of changing them.

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Vipin Siingh

Open to New Opportunity | Proactively Exploring Career Path | Investment Banking | Private Equity | ESG | Management Consulting | Financial Services | Capital Markets | X-Deutsche Bank | X-Moody's Analytics | #OpenToWork
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Navigating conflicting asset valuations involves a structured approach to understand the different perspectives and arrive at a well-informed decision. Here's a step-by-step process to handle such situations: 1. Understand the Valuation Methods Identify the Methods Used: Determine the valuation methods employed by each party (e.g., discounted cash flow, comparable company analysis, precedent transactions, etc.). Assumptions and Inputs: Review the assumptions and inputs used in each valuation method. This includes growth rates, discount rates, market conditions, any other relevant factors. 2. Evaluate the Quality of Data Source of Data: Assess the credibility / reliability of the data sources used in valuations. Current vs. Historical Data:

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2 Compare Methods

Different valuation methods can yield different results. For example, a DCF analysis might give you one figure, while a comparable company analysis (comps) might suggest another. Comps involve evaluating similar public companies and applying their valuation multiples to the target's financial metrics. When facing conflicting valuations, compare the methodologies used . Understand that each has its strengths and weaknesses depending on the context, such as the availability of data or the nature of the industry.

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Christian Carlberg

Manager, Tax Recovery @ Ryan | Expertise in VAT & keen interest in tech innovation & private equity
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Consider the availability of data and the nature of the industry. Use multiple approaches to get a more holistic picture. Remember that valuation is not an exact science - it requires both thorough analysis and informed judgement. By combining different methods, you can navigate conflicting perspectives and arrive at a more robust valuation. At the end of the day, neither valuation model will yield a correct answer. If multiple models give you a significant upside potential you should consider adding the investment into the portfolio.

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3 Market Context

The market context can significantly impact asset valuations. Economic conditions, industry trends, and regulatory environments all play a role. If you're faced with conflicting valuations, consider how each valuation reflects current market conditions . Sometimes a valuation might be based on outdated information or fail to account for recent market shifts. Being attuned to the market allows you to critically assess how each valuation aligns with the present economic landscape.

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Christian Carlberg

Manager, Tax Recovery @ Ryan | Expertise in VAT & keen interest in tech innovation & private equity
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The interest rate landscape might be a significant driver of asset valuations. Being able to have an understanding of the broader trend in rates might give you a comparative advantage in the investing space. Also, be sure to get realistic numbers from the company's management and add your own nuances.

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4 Engage Experts

When valuations conflict, it's wise to engage with experts . Financial advisors, accountants, and industry specialists can provide insights that help reconcile differing valuations. They can critique the methodologies applied , validate assumptions, and offer a third-party perspective that is often more objective. Their expertise can be invaluable in navigating through the complexities of asset valuation and in making a more informed judgment.

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Christian Carlberg

Manager, Tax Recovery @ Ryan | Expertise in VAT & keen interest in tech innovation & private equity
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Having a third pair of eyes looking into your valuation models and data input could be crucial to detect potentially overlooked details or overall errors. However, implementing multiple valuation models should help you with the robustness of your attempt to value a company.

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5 Review Assumptions

Assumptions are the bedrock of any valuation. When faced with conflicting numbers, review the assumptions behind each one . These might include projected growth rates, cost of capital, or operational synergies post-acquisition . Differences in these assumptions can lead to significant disparities in valuation outcomes. By challenging and validating each assumption, you can gain a better understanding of why valuations differ and which might be more accurate.

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6 Negotiate Terms

Finally, when you encounter differing asset valuations in private equity, use them as a basis for negotiation. Valuations are not just about numbers; they're about the narratives they tell about a company's future. If you're on the buy-side, a lower valuation can be leveraged to negotiate a better purchase price. Conversely, if you're selling, a higher valuation can justify a premium. Use the insights from your analysis to negotiate terms that reflect your understanding of the asset's true value.

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Prakshi Dudeja

Corporate Finance Executive - Equity Team; Renewable Energy | #PEek | Ex-Blackstone COE Analyst | Ex-TresVista | M.Sc. FRM | B.Sc. Finance |
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See who the users of the valuation reports are and adjust accordingly! An equity case is different than a buying case. A report for internal uses is different than a report for external uses

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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You're facing conflicting asset valuations. How do you navigate the differing perspectives?

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1 Understand Basics

2 Compare Methods

3 Market Context

4 Engage Experts

5 Review Assumptions

6 Negotiate Terms

7 Here’s what else to consider

Private Equity

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