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September 24, 2013

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Vishrasayan.blogspot.com

Not sure if it’s a norm, but it’d surely surprise me if the GP takes an investment call in a particular portfolio company without as much as doing a cursory review of its exit potential & potential exit valuation – they probably do too, but don’t necessarily assign a value, given the magnitude of arbitrariness in doing so. It hence is somewhat ironic that the exit valuation in this model is a merely a derivative of the overall size/ value of the fund raised by the VC and doesn’t factor-in anything that’d determine the potential of an individual investee enterprise – confounding this further is the VC having to justify this derived value.

So while the proposed analysis does sound like a non-nonsense approach to assessing the fund performance, that part about “reality checking those putative outcomes” would still remain the single most challenging & expectedly the most contentious aspect even as LP-GP engage with an intent to cracking the funding arithmetic.

Nonetheless, it’s good to be reminded that for all practical reasons the sum of individual valuations of portfolio companies in a particular fund is but an unexciting statistic to the PE Portfolio manager in the LP organization keen on showcasing something akin to the promise of an ‘absolute return’ his hedge-fund counterpart typically presents :-)

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