A private equity analyst uses sophisticated financial modeling techniques to review the merits of investing in the stock of an operating private company. Most analysts are employed by private equity firms. These manage an investment portfolio or fund, comprised of either a controlling or substantial minority interest in the equity of the private companies in which they invest. Since there is no readily ascertainable market price for stock shares of privately held companies, 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.
A private equity firm seeks to maximize its investment in the private companies in its portfolio through a variety of different transactions. The firm may seek to offer the shares of the company to the public through an initial public offering. It may also either attempt to recapitalize the enterprise, or sell the company to another corporation — either for cash or in exchange for the shares of the acquiring company. The specific tasks performed by a private equity analyst will vary according to the particular investment strategy employed by the private equity firm at any given point in time.
When an equity fund is reviewing private companies for potential investment, the private equity analyst will most likely perform a due diligence analysis of the company under consideration. Since the value of an enterprise is comprised of many different and varied components, including tangible and intangible assets, 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. He or she may perform discounted cash flow and internal rate of return analyses to support his valuation methodology.
A private equity analyst will also carefully review a private company’s financial statements in order to determine if acquiring an equity position would be suitable considering the investment objectives of the equity fund. In order to make this determination, he may prepare a financial review that computes the present value of a discounted stream of the company’s projected future earnings. As part of his valuation methodology, a person in this position might also examine any competitive advantage the company enjoys by virtue of its dominance in the market.
If the private equity firm is seeking to maximize its return on investment in a company by changing its capital structure, a private equity analyst may prepare financial scenarios under a variable set of assumptions. Such an analysis can help reveal the optimal mix between certain debt and equity instruments, to achieve the highest rate of return for the investment fund. In a stock-for-stock acquisition, the equity analyst will usually assess the value of the stock of the acquiring company by utilizing reliable and accepted business valuation methodologies, to ensure that the transaction meets the profit margin expectations established by the equity fund.