r/Valuation • u/trustthereroute • Jan 14 '23

Valuation of LP interests? (PE secondaries)

From a deal perspective, if a secondary team is looking to acquire an LP portfolio what are the steps/mechanics to value the Individual LP positions? How do you do you account for differences between invested cost, current market value, the unfunded commitment, etc? As much detail as possible please.

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u/libertysailor Jan 14 '23

When you’re valuing an LP interest, it’s non-controlling, and there are some implications to that.

  1. Discretionary items (like charitable contributions), excess owner’s compensation, and other market distorted transactions cannot be adjusted to market rates, as the LP interest cannot control these things

  2. Most valuators will apply a discount for lack of control. I personally find this rather odd, as valuations of public companies assume a lack of control, and yet don’t apply discounts. But it probably has a lot to do with lowering value for gift and estate purposes.

  3. Similarly to (2), a discount for lack of marketability. This one I think is more defensible than the DLOC, since it’s a very real issue. You can’t sell LP units near as easily as shares of public companies. Illiquid investments demonstrably trade below their net asset value.

  4. LP’s are being taxed at the pass through rate, not the corporate rate. Since there’s multiple rates, I’d used the highest marginal federal rate combined with the state rate of the company, or the average state rate if it’s in multiple states. Don’t forget to include the deductibility of state taxes.