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1.2 Equity Industry Practices

  • Popular valuation approaches include Market-based approaches (or comps analysis) and Income-based approaches (e.g., DCF).

  • Market-based approaches suffer from low data quality and quantity problems.

  • Income-based approaches suffer from a lack of asset-specific data and subjectivity in implementations.

  • Low frequency of valuations in private markets burnishes performance metrics.

  • Performance measurement in private markets usually relies on IRRs, MOICs, and PMEs.

  • MOICs ignore the time value of money - the most fundamental tenet of investing

  • IRRs distort performance as GPs time cash flows and combine realised and unrealised valuations.

  • PME approaches use public market indices as benchmarks and over-emphasise asset selection over timing.

In public markets, recent transaction prices make it easy for investors to assess the performance of their holdings. Also, their portfolio value measured at any point in time is close to what could be realised if they were to exit immediately, adjusting for liquidity. However, in private markets, recent transaction prices are not observable and in addition, reported valuations are not close to what could be realised in a fire sale.

Appraisals, the predominant valuation method for private assets, refers to an assessment of the fair market value or FV of a company based on several prescribed approaches that are non-standardised, sometimes qualitative, and subjective.

Once a valuation is determined, there are also different methods to report performance. Note that performance measurement requires at least two observations of transaction price or estimated valuations or one of each, whereas valuation requires a single estimate. In this page, limitations of common industry practices to estimate valuation and report performance are described, thus forming the motivation and guiding principles for our approach to private asset valuation.

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