Can anyone help me with the following question?

PE company acquired 10% of a portfolio company in the form of A preferred shares. The preferred shares have a liquidation preference, cumulative dividends of 10% of purchase price. The preferred also participates with the common in a liquidity event. Portfolio company has some revenue and is in its early stages.

The transaction date was December 1, 20×0. Post money valuation was $30 mill. PE paid $3 mill.

At December 31, 20×0, or a month later, the PE is valuing its investment at $6 mill or 100% increase based on the current value method. The increase in value is strictly due to taking advantage of the liquidation preferences and assuming there is a liquidity event at 12/31. There is no change in EV at year end.

The valuation is by any means aggressive and makes no sense? Can anyone help me with a technical response as to why this will not be a reasonable valuation a month later?

Any help would be greatly appreciated.

can you tell me, types of Free cash flow?
and also tell me growth drivers of each industry.

Questionnaire Regarding Investment Houses:

1. Do investment houses differ from an investment company and investment bank? If there is, what are your advantages over them?
2. How are investment houses formed?
3. What are the functions of this type of financial institutions?
4. Are other than underwriting securities, what are the other activities you do?
5. Do you sell stock of your own other than stocks of other Corporation?
6. How much should a company earn to be able to sell stocks?
7. Are you involved in quasi-banking activities?
8. What are the goals of companies like yours?
9. At what year does the investment house would start to earn profit?
10. Describe the underwriting process.
11. How does investing in this type of institution works?
12. What are the requirements in order to be able to invest?
13. What are the benefits we get from investing?
14. What are the different types of groups within an investment bank?
15. What is the typical hierarchy/ladder within an investment bank?
16. What are the roles of these professionals included in the hierarchy? (briefly)
17. Do you accept foreign investments? How do you deal with them?
18. Can a small corporation form an investment bank? Or it has to be a big one?
19. Is there a bulge bracket bank and boutique bank here in the Philippines? If there is, what type are you?
20. What are the usual problems that the corporation encounters?
21. Are there transactions that are hard to handle? What are these?
22. Are there effects of global crisis in the investments from investors?
23. Can students like us invest in this type of institutions?
24. Why should we pick your company above others if we want to buy securities?
25. Do you prioritize finance graduates over other applicants?

Questionnaire Regarding Investment Houses:

1. Do investment houses differ from an investment company and investment bank? If there is, what are your advantages over them?
2. How are investment houses formed?
3. What are the functions of this type of financial institutions?
4. Are other than underwriting securities, what are the other activities you do?
5. Do you sell stock of your own other than stocks of other Corporation?
6. How much should a company earn to be able to sell stocks?
7. Are you involved in quasi-banking activities?
8. What are the goals of companies like yours?
9. At what year does the investment house would start to earn profit?
10. Describe the underwriting process.
11. How does investing in this type of institution works?
12. What are the requirements in order to be able to invest?
13. What are the benefits we get from investing?
14. What are the different types of groups within an investment bank?
15. What is the typical hierarchy/ladder within an investment bank?
16. What are the roles of these professionals included in the hierarchy? (briefly)
17. Do you accept foreign investments? How do you deal with them?
18. Can a small corporation form an investment bank? Or it has to be a big one?
19. Is there a bulge bracket bank and boutique bank here in the Philippines? If there is, what type are you?
20. What are the usual problems that the corporation encounters?
21. Are there transactions that are hard to handle? What are these?
22. Are there effects of global crisis in the investments from investors?
23. Can students like us invest in this type of institutions?
24. Why should we pick your company above others if we want to buy securities?
25. Do you prioritize finance graduates over other applicants?

First off, great site! I’ve been able to learn a lot and debunk many rumors that typically fly around a college campus about Investment Banking. As a sophomore, what internship opportunities (if any) are available to those with very little experience? Also, is it necessary to have an investment banking internship this summer in order to get the big internships next summer? Thanks a lot!

Coming from a hard-core Economics background, I could not resist the temptation of commenting here. I totally agree with you in inferring that “we cannot imply individual rationality/ irrationality from the market performance, although market is a collection of individuals”. In Macroeconomics, such phenomenon is termed as a micro-macro mismatch. Individuals take decision to maximize their own utility, which may be different from the market return. So individual equilibrium (Pareto efficiency) varies widely from a market equilibrium (market efficiency). There is a lot to say here from macroeconomics and microeconomics literature to explain the discrepancies between individual rationality and market efficiency, but I believe it is clear to what I am hinting to. We cannot judge individual rationality by market performance solely, and especially not judging by only financial market which is just one of the many macroeconomic markets an individual participates in (e.g. labor market)!

The individual irrationality referred by behavioral economics is not implied by their market performance but by their randomness in incentive structure (in loose words, messed up incentive!). So they suggest to utilize random utility function instead of a typical utility function when analyzing individual behavior, but has nothing to do with market performance per se. The causality does not run from market level to individual level at all.

I hope this gives a more comprehensive view to the topic in discussion.