A private equity analyst evaluates the merits of investing in the stock of an operating private company using sophisticated financial modeling techniques. Private equity firms employ the majority of analysts. These individuals oversee an investment portfolio or fund that consists of a controlling or significant minority interest in the equity of the private companies in which they invest. The single most important role of an equity analyst is to perform an accurate valuation of the business’ common stock, in which the private equity firm wishes to invest, because there is no readily ascertainable market price for stock shares of privately held companies.
A private equity firm uses a variety of transactions to maximize its investment in the private companies in its portfolio. An initial public offering (IPO) is a way for a company to sell its stock to the general public. It may also try to recapitalize the company or sell it to another corporation — either for cash or in exchange for the acquiring company’s stock. The specific tasks performed a private equity analyst will differ depending on the investment strategy used the private equity firm at any given time.
When a private equity fund considers a private company for investment, the private equity analyst will almost certainly conduct a due diligence analysis on the company in question. The analyst may use sophisticated financial modeling and accounting techniques to ensure that his appraisal of the business captures its true value, or intrinsic worth, because the value of an enterprise is made up of many different and varied components, including tangible and intangible assets. To support his valuation methodology, he or she may conduct discounted cash flow and internal rate of return analyses.
A private equity analyst will also carefully examine a private company’s financial statements to see if acquiring an equity position is appropriate given the equity fund’s investment objectives. To arrive at this conclusion, he may conduct a financial analysis that determines the present value of a discounted stream of the company’s projected future earnings. A person in this position might look into any competitive advantage the company has as a result of its market dominance as part of his valuation methodology.
A private equity analyst may prepare financial scenarios under a variable set of assumptions if a private equity firm wants to maximize its return on investment in a company changing its capital structure. An analysis like this can reveal the best mix of debt and equity instruments to achieve the best rate of return for the investment fund. In a stock-for-stock transaction, the equity analyst will typically evaluate the value of the acquiring company’s stock using reliable and accepted business valuation methodologies to ensure that the transaction meets the equity fund’s profit margin expectations.