Portfolio Valuation – Case Study

Portfolio Valuation - An Introduction

Portfolio Valuation refers to the process of determining the worth or fair market value of a company or companies held within a portfolio, such as in a venture capital or private equity portfolio. Valuation is a critical aspect for investors, as it helps them understand the potential returns, and risks associated with their investments, report to the stakeholders, update net asset value, present the notional return for the upcoming funds, etc.

The valuation procedure plays a crucial role in making informed decisions regarding the exit or hold strategy and further investment strategy for the PE/VCs. Several factors including economic, industry, and company-specific considerations need to be addressed while concluding the valuation of portfolio companies. With emerging business models, lots of challenges arise with the use of the most appropriate valuation methodology considering the value drivers and market conditions. Now, let’s delve into a case study to examine the valuation of a portfolio company.

Company Overview

We have performed the valuation of a portfolio of 14 companies for a PE firm. Discussing here one of the investments which we have valued applying the market approach. The Company was a privately held company with several rounds of funding from private equity firms. The Company was located in the US and Singapore. The Company provides enterprise-class storage software technology with more than 50 technology patents.

Portfolio Valuation Methodology

We analyzed the income approach, market approach, and asset approach for the valuation of the investment company. Based on the available information, we observed that the market approach would be the most appropriate method for the valuation of the subject company as of May 31, 2021. The income approach was not applied considering the company was not expected to be profitable in the recent projected period. Under the market approach, we applied Guideline Public Companies (GPC) and Guideline Transaction Company (GTM) methods.

1. GPC Method:

This method involves comparing the financial ratios, multiples, and performance metrics of the target company to similar publicly traded companies. The idea is that similar companies should have similar valuations, and the target’s value can be estimated based on the market multiples of its peers.

2. GTM Method:

This method compares the target company to recently completed merger and acquisition transactions in the same industry. The valuation is based on the transaction multiples (e.g., Business Enterprise Value (BEV)/Revenue, BEV/EBITDA) of these comparable deals.

We applied the BEV/Revenue multiple on the revenue metrics for the years 2022 and 2023. BEV/EBITDA multiple was not applied considering the projected EBITDA was negative for the years 2022 and 2023.

Based on the selected sample of public companies, BEV/Revenue multiple in the range of first quartile to the median was considered appropriate considering the factors such as size, profitability, and growth of the GPC companies and subject company. Similarly, the median multiple is selected from the GTM transactions.

Business Equity Value Conclusions

Based on the selected multiple, business enterprise value was calculated for the subject company. The business enterprise value was further adjusted for the cash and cash equivalents and outstanding debt to calculate the equity value of the Company.

Application of Option Pricing Model

As previously mentioned, the Company had several funding rounds and preferred shares had been issued under Series A, B, and C with the common stock. Our scope of work included the valuation of Series B Preferred shares held by the PE fund. These preferred shares had preferential liquidation preference; accordingly, we applied the option pricing model for the allocation of value considering the preferential liquidation preference of each class of preferred shares.

Steps for the Application of the Option Pricing Model

Calculation of distribution breakpoints based on the liquidation preference
Calculation of allocation percentage in different classes of shares for each breakpoint
Calculation of call value applying the Black-Scholas model for each breakpoint, with the following inputs:
– Strike Price: Based on the distribution breakpoint calculated in Step (a)
– Underlying Price: Business Equity value concluded based on the market approach.
– Time: 3 years is assumed based on the management expectation of an exit event
– Volatility: calculated based on the GPC companies for the 3 years
– Interest: Risk-free rate for the 3 years
Allocation of call value of each breakpoint based on allocation percentage in different classes of shares

Concluded Value of PE Investment

The value of Series B preferred shares was calculated based on the addition of allocated value in Step (d) divided by the number of Series B preferred shares. The value per Series B Preferred shares was multiplied by the number of shares held by the PE fund to calculate the investment value.

ValAdvisor Expertise

At ValAdvisor, our dedicated team of experts specializes in determining the value of a business or assets, for transactional, accounting, taxation, regulatory, financing, distressed asset resolution, litigation, insurance, strategic, planning, and operational purposes. Our expertise in various advanced models and simulation techniques helps us in delivering reliable and accurate valuations. Count on us to provide tailored portfolio valuation services that empower you to make informed decisions with confidence.

Portfolio Valuation – Case Study

Portfolio Valuation - An Introduction

Company Overview

Portfolio Valuation Methodology

1. GPC Method:

2. GTM Method:

Business Equity Value Conclusions

Application of Option Pricing Model

Steps for the Application of the Option Pricing Model

Concluded Value of PE Investment

ValAdvisor Expertise

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