Complex Structures Create Valuation Challenges

With the increase in private equity investment activity in recent years, today is an advantageous time to sell a private company. Valuation multiples are elevated, and owners are increasingly able to obtain liquidity. However, as private equity investment has grown, management and ownership structures have become more sophisticated and complex, which has made it more difficult to estimate the value of an ownership interest and created new risks for less sophisticated investors.

A private equity investment can be structured in different ways. In general, the sources of capital and forms of ownership include senior debt, mezzanine debt, preferred stock, common stock, and options and warrants. Depending on the entity’s legal form, ownership interests have different names, such as membership interests, profits interest or common stock, but the economic rights and valuation issues are essentially the same. Furthermore, an instrument can have characteristics of some or all of the different forms of ownership; yet, even seemingly straightforward investments can be complex and create challenges when attempting to value the various instruments and ownership classes.

  Continue Reading on Middle Market Growth

This article is partially reprinted here with permission from Middle Market Growth.