Latest Guide to the Different Kind of Valuation Models for Private Equity Companies

Private equity valuations are very crucial due to its ambiguity and room for free evaluation that exists when compared to a publicly traded business....
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Latest Guide to the Different Kind of Valuation Models for Private Equity Companies

Private equity valuations are very crucial due to its ambiguity and room for free evaluation that exists when compared to a publicly traded business. The operations happen with less current and historical data, lower transparency on future business performance, and the capital structure of the organization might not be totally accessible. There’s also the question of accounting: private organizations are not bound by traditional Generally Accepted Accounting Principles (GAAP) regulations and have a lack of strict reporting demands. 

Many PE/VC firms estimate that the company’s value by using the private company valuation methodsTo evaluate an organization there is a very high demand for sound knowledge that is mainly related to Venture Valuation, because it is also termed as highly holistic evaluation method. All valuations are based on the careful aspects of both hard and soft factors. And they are implemented for the risk assessment of the most essential aspects, such as: 

  • Management 
  • Market 
  • Science and technology 
  • Financials/funding phase 

It is essential to hire private equity professionals who possess strong determination about the valuation methods as accurately and objectively and also help several different assessment approaches that are mainly suited for the evaluation of technology industries, with more growth potential and start-ups of all types. Although not every type of valuation approach is appropriate, they alter as they assess each firm according to their industry and financing phase.  

Private Company Valuation Methods 

Comparing a potential target to recent transactions can be very useful to account for any disparities because of the existence of control premium and assess the target organization’s value from a better position. Here are a few valuation methods which maximizes the career in private equity of an aspiring individual. 

  • Asset-based Valuation Method 

The asset-based valuation method is highly helpful for considering the value of the assets and liabilities of a business. Here the value of a business is similar to the variation between the value of all its relevant assets as well as the value of all its relevant liabilities. 

The benefit of PE/VC organizations hold over investing in public markets is in the timing. There is potential to make huge profits if these organizations can time their entry into the private markets during a period of uncertainty and low valuations and exit into the public markets as soon as the bullish market sentiment comes.  

Commonly, industry averages can be helpful for calculations with a slight premium attached to account for greater cost of equity and debt (since investors have lack of liquidity with holding equity in a private organization, it is an intrinsically riskier investment).  

  • Sum of the Parts Valuation Method 

A conglomerate that has diversified business interests usually requires a various kind of valuation model. Sum of the Parts Valuation Method is among those private equity valuation methodsHere the valuation of every business is done differently and gets added up for the equity valuations. To evaluate beta, PE/VC organizations either use industry averages and then unlevered or lever that number based on what type of beta was used and adjust that number accordingly depending on the target’s credit history.  

It’s frequently said that the valuation is an art and not a science – and this is a fact for investing in the private markets. The calculations are totally related to a series of assumptions and estimates and trusting the accounting processes of the target organization.  

  • Risk Adjusted NPV 

The Risk adjusted Net Present Value (NPV) is the most common valuation method, which is highly used by private equity professional for valuing compounds or products in the industries like pharmaceutical and biotech. The Risk adjusted NPV valuation method uses the principle where each future cash flow is adjusted by the risk to the probability of it actually happening. The probability of the cash flow occurrence is also known as the ‘success rate’. 

The success rates of a certain compound/drug can be estimated, by comparing the probability that the compound/drug will pass the many various enhancement phases (i.e. phases I, II or III) mainly undertaken in the drug development process. 


The long timeline of private equity funds and VC investment means there more flexibility waiting for the best market opportunity while enhancing the operational quality that is not present in the public markets.  

Public organizations are affected by general market momentum and volatility due to the earnings releases and Federal Reserve Policy that can skew stock rates away from “reasonable valuations” and muddle investor sentiment. These risks don’t exist in the private markets, offering an opportunity to offer more returns to investors in the long run without traditional volatility concerns.