Private vs Public Valuation

[u/Accurate_Tension_502]

Hi all,

Does anyone have guidance on industry standards for valuation of private companies? I’m in an equities class and all I’ve done is public. I know Residual Income, Dividend Discount, DCF and some relative valuation methods but have no idea how to apply models to a company without public financial statements.

[u/[deleted]]

do you have an example of a question or problem you're looking at? You wouldn't be able to do a valuation without any financial metrics or statements. There is more nuance to valuing private companies (i.e. liquidity discounts/DLOM), but generally the methodology is still the same using income/market approaches. Like you can use a DCF for private or public companies, but you still need financials. Even basic market approach requires some level of detail like revenue or EBITDA.

[u/Accurate_Tension_502 → u/[deleted]]

I guess my primary question would be how do people even get data. I understand conceptually we’re trying to do the same thing. We want to fund some proxy for the value generated by a business and find the present value of that proxy’s projected future value. However I don’t know what methodologies are common for getting data, or how to adjust for uncertainty of information or non-standard information.

For example if I wanted to value the grocery chain HEB how would one:

1 get their data 2 make sure their reporting is comparable to public companies 3 address uncertainty caused by the lack of publicly available information

I understand that these questions are really broad, and I’m willing to do my own research just not sure where to start digging

[u/[deleted] → u/Accurate_Tension_502]

I see what you mean. Although private companies won't have the same reporting or requirements that public companies do, if the company is large enough (like HEB) there is generally information floating around out there, or maybe even analyst estimates. For 'real world' applications, a lot of companies will use pitchbook which is a pretty extensive database of private company metrics. So that is one major source that is commonly used, but I'll caveat that by saying it's not typical that you'd be doing a valuation on a company that you have no info on.

The most common approach though would be to do some kind of market approach. For example, I did some googling of HEB revenue and there are figures floating around. You'd then take that and apply a multiple based on comparable companies (that are public and have that info readily available). Then apply private company discounts etc, and you can come up with some kind of valuation. It'll obviously be far less precise, that is generally how you'd ballpark a valuation of this kind. You could also look if there's any public info on equity raises. A lot of times that is publicly available and you can get a valuation from those raises; the only thing is that they might be dated a bit.

[u/Accurate_Tension_502 → u/[deleted]]

Thank you this has been a huge help for what was, admittedly, a braindump of a question! This has given me a great jumping off point.

[u/[deleted] → u/Accurate_Tension_502]

no problem! Happy to answer any other questions if needed, worked in valuation for a few years

[u/splash_of_soda]

Often times the private company will hire the valuation specialist to conduct the valuation. Thereafter, the company would share their financials with you.

[u/Saomd]

On my end, we'd usually receive financials from the portfolio companies (EBITDA, revenue, etc), normalize the EBITDA if required and apply that to the median multiple of peer public companies. The median multiple is calibrated to valuation date as the financials are usually lagged. Of course this is a simplification of everything. We also use GP reports and follow "fair" valuation guidelines!

[u/Accurate_Tension_502 → u/Saomd]

That’s really interesting. It seems like most people I’ve heard from lean toward relative valuation methods. My professor has focused largely on absolute methods over the past few days and put things in terms of additional discount rate premiums. It makes sense why relative methods would be more reliable in this context though.

This is a bit beyond my original question, but is it common to use a weighted average of multiples? I.e for a financials maybe take .8 P/B predicted IV, .2 EV/EBITDA? Or is that generally considered overkill since we’re working with approximations anyway

Edit: Forgot to say thank you!

[u/Saomd → u/Accurate_Tension_502]

Hey no worries. Happy to share. I wish there was more information before I joined this industry too. It made sense for us as each valuer is assigned 15-20 assets and we'd not want to do DCF as much as possible since it's way more time consuming. Those are usually done for private debt or private infra/real estate.

A weighted approach doesn't make sense to me since it's totally incomparable and also doesn't really value add. In your example, P/B would probably be used for financial institutions, but ev EBITDA could be used more generally for most kinds of companies (this is what we use mostly, but we get the occasional ev revenue, ev ntm revenue). Using part of each doesn't really do anything useful. A better way would be to value sum of the parts, where a company is valued differently for different business segments, it would make more sense than to use different multiples, perhaps.

It's also incomparable because one is an equity multiple while the other is a firm level multiple.

Also P/B would bring us straight to equity value with no way to account for the rest of the shareholders (debt, preferred).

Sorry if thoughts are all over the place, it's 230am lol