Private Equity Valuation — A Quantitative Approach

  1. Peerset multiple analysis,
  2. Cashflow analysis and forecasts (usually using the Discounted Cashflow Valuation model), and
  3. Some form of asset valuation or coverage ratio analysis.

Value Investing Concepts

  1. Return on Assets
  2. Return on Capital
  3. Free Cashflow/ Assets
  4. Margin Growth and Stability (computed using standard deviation and geometric mean)
  1. Return on Assets
  2. Free Cashflow/ Assets
  3. Cash Accrual Ratio
  4. Leverage Ratio
  5. Liquidity Ratio
  6. Margins
  7. Sales/ Assets
Quality = 0.5*FS + 0.5*FP

Exercise Constructs

Datasets Considered

Findings

Delving into the Details

Applications to PE — Other Considerations

Areas of Further Study

  1. Metrics such as EBIT, ROCE and Gross Profit may not hold the same relative importance across industries — possibly can use machine learning to determine which metrics have the strongest relationship with the target variable per industry. Once this is known, it is relatively simple to tweak the algorithm for each industry
  2. Further explore private equity investee companies and corroborate the findings above for those companies. Given that data availability is an issue for those firms, it’s probably best to look at listed investee companies — this is the path I intend to take.
  3. Build this into a more robust monitoring tool — The break out of the scores into FP and FS can be used to identify red flags in a portfolio company and can help focus the investment manager’s time and attention.
  4. Wesley and Tobias in their book also talk about fraud detection algorithms — I intend to code for those and examine applicability for PE. Given developing markets in Asia and their various, ahem, idiosyncrasies, I’d be delighted to have some sort of tool to check for this.

Conclusion

Tools used:

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Private Equity professional, passionate about applying data science and machine learning to alt assets

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Tushar Sinha

Tushar Sinha

Private Equity professional, passionate about applying data science and machine learning to alt assets

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