Methods for Valuing Private Company Holdings in a Portfolio

Valuing a private company is challenging on its own. But valuing an entire portfolio of private companies is even more complex. Each portfolio company may be from different industries, risk profiles, and will be at a different lifecycle stage.

Also, unlike publicly traded stocks, private equity does not have quoted prices. As a result, portfolio valuation requires a methodical blend of valuation approaches, each selected based on data availability, company maturity, and valuation purpose.

Top Private Company Valuation Methods

Without further ado, let’s discuss the methodologies you should familiarize yourself with since they often come in handy for private company valuations.

Guideline Public Company Method (GPCM)

The GPCM is a market-based valuation approach where valuation multiples of comparable publicly traded companies are applied to a private company’s financial metrics.

How should GPCM be used for portfolio valuations?

Since GPCM is anchored in observable market data, it is easy to explain to limited partners (LPs) and auditors. GPCM valuations can vary depending on the chosen guideline public company, so choose this carefully after considering all relevant factors.

Another challenge is the need for subjective adjustments. To address this, you should validate each choice with relevant data or expert opinions.

GPCM Example

Suppose a portfolio company generates earnings before interest, taxes, depreciation, and amortization (EBITDA) of $6 million. Public companies from the same industry and region, and earning comparable revenue, trade at a median EV/EBITDA multiple of 10×. Also, based on your research, a 25% discount for lack of marketability (DLOM) seems appropriate.

So, your portfolio company’s valuation as per GPCM would be = EBITDA × Median EV/EBITDA multiple of comparable public companies × (1 − DLOM) = $6 million × 10 × (1 − 25%) = $6 million × 10 × 75% = $60 million × 75% = $45 million

Thus, GPCM allowed us to estimate a market-aligned valuation of $45 million for the portfolio company.

Discounted Cash Flow (DCF) Method

The DCF method is a widely-used income-based valuation method where a company’s value is estimated as the present value of future cash flows.

How should DCF be used for portfolio valuations?

The DCF method is often the preferred choice for valuing established companies with predictable cash flows. Since you’re building a financial model specific to a company, this method gives you a good chance at capturing company-specific dynamics.

However, this ability (or need) to incorporate a diverse set of factors has a flip side. If you do not have sufficient data to build financial projections and make informed assumptions, the DCF method can only provide mediocre accuracy.

DCF Example

Assume that a company has the following free cash flows to equity.

Year	Free cash flow to equity (FCFE)
2027	$10.00M
2028	$12.00M
2029	$14.40M
2030	$17.28M
2031	$20.74M

We will assume that the terminal value at the end of the projection period is $25 million.

Then, upon applying a discount rate of 15% to account for risk as well as inflation, we will arrive at the following discounted cash flows, discounted terminal value, and company valuation:

Year	Amount	Discounted cash flow
2027	$10.00M	$8.70M
2028	$12.00M	$9.07M
2029	$14.40M	$9.47M
2030	$17.28M	$9.88M
2031	$20.74M	$10.31M
2031 (Terminal value)	$25.00M	$12.43M
Valuation		$59.86M

In our example, we arrived at a valuation of $59.86 million assuming a FCFE growth rate, terminal value, and discount rate of 20%, $25 million, and 15%, respectively. Had the market conditions or the company’s internal dynamics been different, we could have adjusted these assumptions to once again arrive at a pragmatic valuation estimate through the DCF method.

Venture Capital (VC) Method

The Venture Capital method estimates a company’s value by discounting the expected exit value based on the investor’s target return on investment (ROI) and then subtracting the investment amount. This method is meant to align the entry valuation with the investor’s financial needs, and hence it often forms the basis for funding round negotiations.

How should the VC method be used for portfolio valuations?

The VC method can help investors time their exits. Suppose the valuation in an exit opportunity, such as incoming investors buying out existing investors, is greater than the VC method valuation. This would be a clear signal that the company cannot be expected to grow at the pace investors expect it to.

Conversely, if a VC method valuation is lower than the exit opportunity valuation, investors might want to hold on to their investments since the company is poised to grow faster than expected.

VC Method Example

Suppose a company’s valuation is expected to reach $120 million in 5 years, and investors have a target ROI of 30%. We will also assume that the investors intend to invest $10 million.

Then, the company’s valuation as per the VC method would be = $120 million ÷ (1 + 30%)5 − $10 million = $32.32 million − $10 million = $22.32 million

So, investors can achieve their goals if the pre-money valuation is set at $22.32 million as per the VC method.

Berkus Methods

The Berkus method is a qualitative valuation method where a company is assigned a valuation based on how well it addresses certain risk factors, which are sound idea, prototype, management team, strategic relationships, and product rollout or sales.

Based on a qualitative assessment, you can assign a value between $0 to $500,000 for each of these factors, the sum of which becomes the company’s valuation.

How should the Berkus method be used for portfolio valuation?

The Berkus method is used for pre-seed or seed stage companies to prevent overvaluation arising from assumptions. Depending on the circumstances, you can edit the $500,000 value limit per risk factor. The main utility of this valuation method lies in leveraging qualitative insights where quantitative data doesn’t exist.

Berkus Method Example

Suppose you score a startup in the following manner:

• Sound idea – $400,000
• Prototype – $300,000
• Management team – $500,000
• Strategic relationships – $250,000
• Product rollout or sales – $150,000

Then, its valuation would be $1.6 million.

Putting It All Together

Here’s how you can effectively use the valuation methods discussed in this article:

• Match method to stage – Berkus and VC methods are appropriate for early-stage companies, while GPCM and DCF are appropriate for more mature companies.
• Deliberation over intuition – Base your assumptions on clearly documented data rather than subconscious biases.
• Reassess valuations regularly and systematically – Private company valuations are not static. Material events such as new funding rounds, customer wins or losses, regulatory changes, or macroeconomic shifts should prompt a reassessment.
• Use multiple methods where possible – Applying two or more methods to the same company allows you to make a more accurate estimation of its value. But if you see large differences between methods, instead of simply taking averages, you should review your assumptions.

Eqvista – Precision rooted in market expertise!

No single valuation method can accurately capture the value of every private company in a portfolio. The most defensible portfolio valuations are built by selecting the right method for each company, applying disciplined assumptions, and cross-checking results against alternative approaches.

For deeper technical explanations and industry-specific guidance, you can always refer to the linked articles referenced in this guide.

If you feel the need for professional assistance in portfolio valuations, consider relying on Eqvista. Our seasoned team of valuation analysts will be happy to hear from you!