Variant-Triggered Multiple-Based Probabilistic Valuation Model (VTMP) for Private Equity Investments

Abstract

This article explores developing a valuation methodology for private equity investment. Investors use either relative valuation based on multiples for revenue, operating income, and EBITDA, or they use discounted cash flow analysis to estimate a company’s equity price. The approach presented in this article incorporates a combination of relative valuation multiples along with weights for each of the relative valuation variants (revenue, operating income, and EBITDA), as well as probability analysis to develop a valuation methodology. Probability analysis is used instead of discounting future cash flows, as it helps in holding the current valuation while taking into consideration the length of the investment holding period for private equity investments.

TOPICS: Private equity, statistical methods, fundamental equity analysis