GPs advised to track valuation comparables

Accountants are urging GPs to keep close watch of M&A activity in order to ensure their valuation procedures use the most up to date comparables.

In order to have the strongest valuation process possible, GPs should be constantly on the lookout for new comparables, according to accountants and auditors speaking to PE Manager.

One auditor said not tracking public market M&A activity could leave GPs short of comparable public companies to value their portfolio companies against.

The auditor described a situation where a private equity client had used two publicly traded comparables to value a portfolio company without realizing both comparable companies were recently acquired.

“The multiple that was paid for them in taking them private is useful, but a year from now that is not going to be useful.”

The auditor added that GPs who allow their public comparable data to go stale must learn alternative valuation methods, for instance discounted cash flow models, that they may be less familiar with when valuing certain sectors or company sizes. 

Other accountants and auditors speaking to PE Manager also mentioned private equity firms should be aware of holding recently acquired investments at cost for too long. 

“Referring to a valuation estimate of a private equity asset as 2.45 times cost, four years after it was acquired, does nothing to support the valuation. Cost has not been relevant for several years by that point,” said Anthony Rockley, partner in KPMG’s private equity practice.

For more insights from auditors, be sure to check out PE Manager’s September issue.