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
Operational Improvements
Financial Engineering
Distressed/Stressed
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.
