Market & internal analysis of a PE firm’s portfolio companies’ valuation with an emphasis on ESG reporting & incorporation

Abstract

Gimv is a private equity firm that specializes in the European midmarket space. Therefore it is not immune to the new developments in the financial markets in both Belgium and Europe. A green wave is flowing over Europe and brings along new regulations, stricter reporting standards, higher expectations from customers and the need for improved valuation techniques. Private equity firms have to adapt to these new changes. This report conducts an extensive revision of the valuation processes of Gimv and evaluates the possible integration of ESG metrics into these processes. In the second phase, an extensive outlook into the future regulation and disclosure requirement is given. The first part of the paper required a study of the internal valuation documents of Gimv and was combined with a literature review on the valuation techniques of Gimv’s peers. Both Gimv’s techniques and those of the peers were checked against guidelines provided by the appropriate legal frameworks. Following this initial research an exploratory analysis was performed on the historical data of Gimv’s portfolio companies. The initial results of the exploratory analysis prompted a volatility analysis of the valuations of these portfolio companies. The findings of the first part of the report show that the current valuation technique of Gimv, the multiples method combined with a discount that corrects for liquidity, market circumstances etc. appears to be the industry standard. The main reason for this choice can be found in the speed and efficiency by which a valuation can be conducted in this way. The exploratory analysis and the following volatility analysis provided insights on the size of the discounts applied by Gimv. The first part of the paper concludes that a reduction in the size of the discounts would bring the valuation of the portfolio companies closer to their fair value. For the second part of this paper, an examination on the current and future reporting standards and the possibility to incorporate these into valuation practices is performed. Overviews of the different regulatory frameworks, ESG rating practices and academic literature are given next to interviews with experts in the field of ESG. Additionally, the current sustainability approach of Gimv and its listed European peers are evaluated by reviewing their annual (sustainability) reports. The regulatory research concludes that the vast alphabetic soup of rules and standards will consolidate towards two frameworks, one established by the EU and one set up by the ISSB. The attempted construction of a ESG scoring framework yielded interesting insights in how ESG scoring remains very difficult even when enough data could be amassed and in how ESG scoring, even when done by experts, still result in biased outcomes. Finally, although Gimv is on track to become a leading company in terms of reporting, more efforts will have to be made to gather data, to explain their negative externalities and allow for thorough reviews of their portfolio companies.