Do the mega rounds for AI investments change the rules for all types of valuation?<\/p>\n
<\/p>\n
I have been pondering the issue of how and when to use comparable transactions when performing a prite company or private shareholding valuation. In the days when wasn\u2019t such an extreme range of funding rounds for companies at all stages the overarching principle that a fundraising transaction MIGHT be relevant to help us establish a price did not come into question. \u00a0Early rounds raised small sums for small companies; later rounds, larger for larger. \u00a0But what we are seeing with AI is that even startups can launch at a multi $bn valuation. More and more funding rounds are being completed in the \u00a3ms even at very early stages of a company\u2019s life. \u00a0It all feels a bit separate from a \u201cnormal\u201d company. \u00a0 Indeed in many cases the inferred valuations using such multiples can cause massive distortions if you are not exceptionally careful.<\/p>\n
When half the world seems to be on hockey stick growth not just in terms of valuation but also in terms of sales in the other half even decent growth can start to look pedestrian. \u00a0Then there is the issue of will the AI half eat the other for breakfast so even historical valuation data points will end up looking ridiculous.<\/p>\n
As valuers our job is to deeply consider all these issues.<\/p>\n
Then there are stock market valuations \u2013 another area fraught with risk if you do not apply deep thought to which comparables you might use. \u00a0There are obvious tricks which must not be missed \u2013 the premium of the US markets over the UK\u2019s London Stock Exchange can and must be considered if the comparables are listed there. \u00a0But what if it\u2019s a company listed in the US but which mainly operates in China? Should there by another adjustment for country of operations factors or can was assume efficiency in the US market that irons out that issue?<\/p>\n
With some saying that the liquidity premium exists for listed stocks (so discount a private company for illiquidity) whilst others say that investors should demand a premium for private company illiquidity, it can feel like the right hand does not know what the left hand is doing!<\/p>\n
Now we are a few years on from Covid-19 we can probably safely say that pre Covid multiples can be ignored.<\/p>\n
So with all this noise is it still a good starting point to say that most old school companies will generally be valued within the 3-8x EBITDA bounds?<\/p>\n
Today I\u2019m minded to say yes provided that an assessment of what a willing buyer of the whole company would pay seems reasonable and can be backed up by M&A comparables. \u00a0What I actually mean of course is that the payback requirements of that willing buyer would be met if the price was in those bounds, because as we all know ultimately the buyer sets the price and they must be able to explain to their shareholders why an acquisition will not only pay for itself quickly but also enhance profits (ultimately to pay dividends) and the equity value of the enlarged group?<\/p>\n
I think AI has the potential to move the dial on old school companies that adopt its use correctly. \u00a0Those that can reconfigure to use AI in a way that improves efficiency, productivity, profitability and innovation will start to company a premium on their old school peers that do not.<\/p>\n
This is a topic worthy of a one-day conference which needs to involve many more people than just the AI community. \u00a0Meanwhile, and until I gather more evidence on the subject I am actually minded towards optimism. \u00a0I think even old school companies that can demonstrate they are AI-engaged or enabled will start to command an increased value. \u00a0Those that ignore AI will become even more depressed. \u00a0So I will dare to take a stand (which holds good by the way until a market crash or a big macro-economic event) I think the bounds for a standard valuation have not shifted left or right; instead I think the bounds have widened to 2.5x to possibly 10x EBITDA.<\/p>\n
What are you seeing in the deals taking place? \u00a0Do you have matters on your desk which might need someone to consider these and the many other gnarly issues that must be thought through to make a valuation truly defensible? Why not let us know? It\u2019s these debates that move industries forward.<\/p>\n","protected":false},"excerpt":{"rendered":"
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