Valuation of a High Growth Business

Comparing a High Growth Business to Similar Firms on the Stock Market is the Simple Approach to Valuation



The valuation of a high growth business is a key concern for the owners of the enterprise as well as outsiders such as prospective investors. As an example, a corporate buyer that plans to acquire the business has to figure out how much the entire company is worth. The same is true of a savvy investor in the stock market who wants to buy a block of shares in a listed firm.

A simple way to gauge the value of a business is to compare it to similar firms in the marketplace. The matchup against listed firms is of course directly relevant in the case of a public offering of shares. However, the same analysis can serve as a point of reference in other settings. An example of the latter occurs if the owners decide to sell the company, whether in whole or in part, by way of a private transaction.

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Earn More by Doing Worse: Or, Who’s the Golden Goose of Hedge Funds?

In the popular imagination, hedge funds are exclusive outfits that deliver scads of profit at minimal risk. Sadly, though, the investors as a group have found that the outcome is precisely the opposite of what they had fancied.

In terms of net returns to the customers, even the top tier of hedge funds lag comfortably behind mutual funds; and the latter pools are widely known to underperform the benchmarks of the stock market. To make matters worse, though, hedge funds go out of business in droves whether the market at large happens to be rising or falling.

The custodians of hedge funds take a big chunk of the earnings, usually ranging from 20 to 50 percent of the spoils, during any period in which the portfolio happens to turn in a profit. For this reason, the general public believes that the goals of the stewards are aligned with those of the patrons.

But this outcome is only half of the arrangement. Unfortunately, the bulk of investors pay little or no mind to the flip side of the picture. And the downside is the scary part. When a bet goes sour, the investors take the fall while the plungers that caused the blowup get off without a scratch.

Due to the twisted pattern of payouts, the incentives of the operators are at odds with the objectives of the investors. Moreover, the crummy performance of hedge funds on average indicates that the operators as a group do in fact place their own interests ahead of their patrons’.

The purpose of this article is to lay bare the absurd pattern of payoffs which pits the earnings of the operators against those of the investors. Due to the mismatch, the stewards of wildcat pools take batty risks that bolster their own welfare at the expense of the clients.

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Crunch of Hedge Funds

After a Sweeping Wipeout at the Dawn of the Millennium, Hedge Funds Face a Patchy Future.

With increasing frequency, hedge funds have come to play a starring role in major blowouts in the financial arena. A showcase was the crash of October 2008, a debacle that wiped out trillions of dollars in the stock market, knocked down the banking system, and stamped out the routine loans needed by mainstream companies to go about their business.

In the wake of the deluge, the players in the hedge fund game collapsed by the thousands. Even so, the washout of the pools en masse will not spell the end of financial meltdowns. Rather, fresh waves of newcomers to the field are sure to step into the void and take up similar techniques. For this reason, blowouts of all sorts will continue to flare up in the future.

On a positive note, though, it is a straightforward task for the investor to avoid the dangers that plague the field of hedge funds. A healthy skepticism for dicey schemes and a disdain for excess leverage are the main traits needed to steer clear of the pitfalls.

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