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PRIVATE EQUITY: VALUATION OF DEALS

Valuation concepts and approaches to company and business valuation in private equity in India. Learn about income-based, asset-based, and market approaches to valuation, and explore exit options available to private equity funds.

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PRIVATE EQUITY: VALUATION OF DEALS

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  1. PRIVATE EQUITY: INDIA’S GROWTH CATALYST PRIVATE EQUITY: VALUATION OF DEALS BY J. MAITRA & ASSOCIATES

  2. VALUATION CONCEPTS TOPICS COVERED APPROACHES TO COMPANY & BUSINESS VALUATION PRIVATE EQUITY IN INDIA

  3. VALUATION CONCEPTS

  4. Valuations provide useful baseline to establish a value for a business as on today or a forecasted period • It serves as an alternate - to the role that major stock exchanges play for public companies - for small/unlisted companies • Assists in arriving at exit strategies for the Existing Owner & Prospective Financial/Strategic Investor to obtain value for their stake in the companies when they desire to sell ABOUT VALUATIONS

  5. Valuation of Large Public-Listed Companies • Actual Stock Price on Exchanges - function of supply-demand and investor preferences • Analysts’ Estimates • They typically fall within a reasonable band In India, most investment opportunities are in companies that lie between these two extremes • Companies are often privately-held • Project rapid growth • Future performance subject to high degree of variability • Simpler Valuation Process • Derived from Capital the Company needs & % stake expected by VCs Early Stage Investing THE ESSENCE OF VALUATION

  6. VALUATION UNCOVERS WORTH OF MANAGEMENT Unless the seller has established a UNIQUE & SCALEABLE BUSINESS MODEL, it's not likely that an informed purchaser will pay a substantial premium; however, for the seller who has positioned the business properly, the rewards can be substantial. YES NO Is Derived Valuation > Expected Value ? THE UNDERLYING PRINCIPLE Opportunity for Business Owner to work towards increasing Value of the Company Might be an Opportune time to sell

  7. APPROACHES TO COMPANY & BUSINESS VALUATION

  8. INCOME BASED APPROACH Discounted Cash Flows Dividend Discount Model ASSET BASED APPROACH Net Asset Valuation MARKET APPROACH Relative Valuation using Multiples APPROACHES TO VALUATION

  9. Free Cash Flows to Equity discounted at Cost of Equity i.e. Ke* INCOME BASED APPROACH DISCOUNTED CASH FLOWS • ISSUES • Easily Manipulated • Not Directly Linked to Market • Forecast Revenues & Costs – a Challenge • Not Ideal Method for valuing Firms with trouble, under-utilized assets * Ke is calculated using Capital Asset Pricing Model (CAPM) adjusted for Small Company Premium & Specific Company Risk Premium if any

  10. INCOME BASED APPROACH Contd…. • ISSUES • Applicable to limited number of companies • Undervalues Companies that pays no or less dividends • Investors, besides dividend also look for capital appreciation • For Academic Purposes Only

  11. ASSET BASED APPROACH • ISSUES • Limited Applicability for Operating Entities • Not used when investments are financial in nature

  12. RELATIVE VALUATION • ISSUES • Difficulty in finding similar Listed Companies/ PE/ M&A transactions

  13. Final Valuation is a Derivative of Mathematical Weights applied to various approaches & Professional Judgment • Both methods involve subjectivity • Final Valuation should prove the test of Common Sense & Reasonableness • Last but not the least, parties concerned Negotiate hard on arriving at a Value of the Company but the call is largely a gut feel valuation by the investor REACHING A CONCLUSION ON VALUATION

  14. EXIT OPTIONS IPOs Mergers & Acquisitions Management Buy-out Sale to Another Fund Buyback by Promoter/ Company Stock Market Duration of Private Equity/ Venture Capital Investment normally ranges from 3-7 years EXIT OPTIONS AVAILABLE TO PRIVATE EQUITY FUNDS In case of Buyback by Promoter/Company , the value at which PE Fund would exit is IRR or market-based and is pre decided at the time of investment on a certain valuation

  15. PRIVATE EQUITY IN INDIA

  16. Current PE Market… …Investor Dilemma • Very rapid expansion in number of India-focused funds • Risen from 8 in 1995, to 300+ in 2010 • Evaluating managers without track records • Selecting funds from a broad universe • Large number of “first time” funds • ~15 India-dedicated private equity funds with at least one fund vintage • Gaining access to the best funds

  17. VALUATION IS TEMPORARY BUT CONTROL IS FOREVER THANK YOU

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