Valuation Glossary

Private equity refers to investment funds that buy, manage, and restructure companies that are not publicly traded on the stock market. Private equity firms aim to improve the performance of these companies and increase their value over time. Eventually, they sell the companies for a profit through various exit strategies, such as selling to another company, taking the company public through an initial public offering (IPO), or other means.

Price/earnings multiple (P/E multiple) is a financial ratio used to value a company's stock by dividing its current market price by its earnings per share. It helps to compare the relative value of stocks or companies in the same industry. A higher P/E multiple indicates that investors are willing to pay more for each dollar of earnings, which may reflect a higher growth rate or more favorable outlook. However, it should be used with other metrics and factors to assess a company's financial health and growth prospects. Overall, P/E multiple is a useful tool for investors and analysts to assess the value of a company's stock and market sentiment.

Present value (PV) is the financial value of a future stream of cash flows or a future lump sum payment, calculated by discounting it back to its value in the present using a discount rate. It helps in comparing cash flows or payments that occur at different times and is used for financial decision-making, like determining the worth of an investment or assessing the value of future cash flows or payments.

Premise of value is the underlying assumptions or conditions used to determine the value of an asset or business. It can vary depending on the context of the valuation and may include assumptions about the future of the business, the type of transaction, or the market conditions. The premise of value is important to define at the outset of a valuation engagement to ensure that all parties involved have a clear understanding of the underlying assumptions and conditions used to determine the value.

Portfolio discount is a term used in finance to describe a reduction in the value of a group of assets, like a portfolio of stocks or bonds, that is greater than the sum of the individual assets' values. It is often due to the lack of liquidity or marketability of the assets, which can make it challenging to sell them or attract buyers, resulting in a lower price for the portfolio as a whole. Portfolio discounts are often calculated as a percentage of the net asset value of the portfolio and can impact the returns and performance of the portfolio over time. It's used to assess the risk and potential upside of investing in hard-to-value or illiquid assets.