Sanjay Bakshi Replies To A Mail From A Friend On Valuation

Sanjay Bakshi Replies To A Mail From A Friend On Valuation by Fundoo Professor

Begin forwarded message:

From: Sanjay Bakshi <sanjay>

Subject: Re: question

Vanguard’s move into PE may change the landscape forever

Private equity has been growing in popularity in recent years as more and more big-name funds and institutional investors dive in. Now even indexing giant Vanguard is out to take a piece of the PE pie. During a panel at the Morningstar Investment Conference this year, Fran Kinniry of Vanguard, John Rekenthaler of Morningstar and Read More

Date: 11 April 2015 10:11:48 GMT-4


I don’t think in terms of entry multiples. I do think about exit multiples though and never value a business at more than 20 times owner earnings ten years from now. And I only limit to high ROE, low leverage businesses (most of my portfolio businesses are debt-free) which can grow earnings where return on incremental capital is high.

Under those conditions, no matter what the entry multiple, I can estimate a return over ten years. If entry multiple is high, I factor in a multiple contraction, and if low, then an expansion. Obviously the best returns come in the latter situation but by focusing on expected returns, I have sometimes bought high P/E businesses too because even if there was a multiple contraction, there is good money to be made in a decade…

In some businesses, I don’t go beyond 5 years – as my visibility is a lot less in them.

Also when I said 20x multiple ten years from now as maximum I will value the firm at, I mean it. Many of them are valued at 15x and some as low as 10x…

It’s pretty rudimentary, but has worked for me over the last several years…

On 10-Apr-2015, at 19:33, xxxx wrote:

stupid question may be : how will you correlate a compounder roe, eps growth to a pe multiple or any multiple. have u come across any mathematical formula. i think i saw some people writing about it but cant remember.

no rush or urgency.