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February 28, 2019

Cobalt’s latest webinar featured  Roy Walker, a member of Hamilton Lane’s Fund Investment Team. Specifically, he discussed how LPs could utilize the valuation bridge to evaluate GP performance. Keep reading to find out more about the valuation bridge.

Building the Valuation Bridge

The valuation bridge allows LPs to evaluate GP performance. That being the case, three buckets of value creation build the bridge: EBITDA growth, debt paydown and margin expansion.

  • EBIDTA Growth – The first bucket is EBITDA growth. EBITDA growth is composed of revenue growth and margin improvement. Furthermore, it approximates how much a buyer would be willing to pay the GP for the amount the GP is increasing the company’s free cash flow over the hold period.  
  • Debt Paydown – Debt paydown is the next bucket. This is the amount that the company has reduced its net debt over the hold period. Admittedly, a company can have a positive value for debt paydown without paying debts if it increases its cash on hand. 
  • Margin Expansion – The third bucket is margin expansion. Margin expansion quantifies how much value is created when selling the company at a different multiple than it was bought for. It also assumes that the GP doesn’t improve the company’s cash flow at all.

Using the Valuation Bridge to Evaluate a GP

As mentioned, LPs use the valuation bridge to evaluate how a GP is adding value through its underlying investments. With this in mind, we’ve provided some examples of how a GP can add value through various methodologies:

Growth Scenario

Evaluate GP Performance: Growth Scenario
Source: Cobalt LP. For illustrative purposes only.

Operational Improvements

Operational Improvements
Source: Cobalt LP. For illustrative purposes only.

Financial Engineering

Distressed/Stressed

Financial Engineering
Source: Cobalt LP. For illustrative purposes only.
Evaluate GP Performance: Distressed Stressed
Source: Cobalt LP. For illustrative purposes only.

Final Thoughts

To conclude, the valuation bridge is a valuable tools for LPs wanting to learn more about how a GP is creating value. Request a replay of the webinar to learn more about this topic at demo@cobaltlp.com. Moreover, access our Valuation Bridge White Paper to learn more.  

Tags:

Private EquityTechnologyValuation Bridge

In Diligence, Performance, Webinar
by Cobalt LP
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In 2016, Hamilton Lane, a global private markets asset management firm with more than 28 years of experience, together with Bison, a cutting-edge software solutions firm, brought Cobalt to the market. This unique partnership created a leading private markets platform with a robust product suite of solutions for both GPs and LPs.

In 2020, Hamilton Lane wholly acquired the Cobalt LP business from Bison, fully bringing the limited partner product in house. Hamilton Lane continues to enhance capabilities and drive the Cobalt LP vision forward by delivering data, analysis, reporting, and diligence solutions to limited partners.

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