January 23, 2019
Modern LPs want to have a better understanding of the underlying companies held in their fund investment. To do so, LPs are requesting company level, or deal level, cash flows from GPs. With this information, LPs can analyze how their fund’s performance metrics have changed over time and determine what factors are driving quarterly changes in NAV. However, what if an LP wants to take a deeper dive?
Using the Valuation Bridge
LPs can take a deeper dive by using a valuation bridge to analyze how GPs have created value in a company or across multiple companies over a hold period. As shown below, LPs can use company level operating metrics to show what value is attributable to various factors such as revenue growth, margin expansion, debt pay down, etc. LPs can go one-step further by rolling this analysis up to the fund level or cutting it by various attribution categories such as sector or geography.
The valuation bridge provides LPs with valuable insight into a GP’s strategy. For instance, LPs can quickly see whether a GP has:
- Benefitted from rising valuation multiples.
- Relied heavily on financial engineering.
- Driven fundamental improvements in its underlying portfolio companies, leading to revenue growth or margin expansion.
Source: Cobalt LP. For illustrative purposes only.
The Valuation Bridge through Technology
While the valuation bridge is very effective for LPs, it can be cumbersome to create manually. Technology solutions, such as Cobalt LP, help to simplify this analysis. With Cobalt, LPs only need to upload the company level cash flows and operating metrics. With this information, Cobalt LP can automatically run the calculations and build out the valuation bridge. As shown in the graphic below, LPs can dynamically filter down their portfolio to create custom visualizations for a specific company, geography or even deal source.
Available Filters in Cobalt LP
Source: Cobalt LP. For illustrative purposes only.
Final Thoughts
The valuation bridge is an important piece of analytics for LPs who want to take a deeper dive into their investments. Technology solutions, such as Cobalt LP, allow this analysis to be approachable and efficient for many LPs. For more information, please check out our white paper.
To learn more about how GPs are using the valuation bridge, check out Cobalt GP’s white paper.
