Scenarios Help Private Equity Evaluate Price

Abstract

Effective strategies come from a full but never perfect knowledge of how the company will interact with its customers, supply chain, and competitors. By building scenarios management can explore how the company will fare in varying states of its environment. Inputs on macroeconomics, the industry, and competition can dramatically alter business value. Prepared management teams are those who have tested their business model under a full range of inputs. Successful private equity players run scenarios to determine a reasonable range of prices for acquisition candidates and whether they can extract value.

TOPICS: Private equity, simulations, factors, risk premia