Welcome,
In Part 1 last week, I introduced the Entry Multiple Test - a simple framework for validating GP portfolio valuations by comparing entry multiples to current marks. The red flag? Systematic multiple expansion across most of the portfolio without underlying growth.
But knowing the test is only half the battle. The real challenge comes when you raise these questions with a GP and they push back.
Here's how to cut through the standard defenses - and what to look for in managers who actually maintain valuation discipline.
Before we dive into Part 2, I want to address a great question from last week:
Wouldn't this entry multiple test penalize value investors who buy at 8x and now hold at 9x, compared to large cap investors who bought at 16x and still hold at 16x, even if the market has gone down?
Short answer: Yes.
Longer answer: The Entry Multiple Test is powerful, but it's just one tool in the broader question of "does the evidence support an investment in this GP?"
And in this case, I’d probably believe the mark of the value investor more, subject to good answers on the questions below.
When You Push Back: Common GP Defenses (and How to Handle Them)
Once you've identified the pattern and raised the question, be prepared for the standard responses. Here's how I approached each, which served not only to understand the story, but also to understand whether marks were aspirational or analytical.
This might be one of my favorite parts of any diligence. Not because I want to grill the GP, but because it gives me an insight into their analytical rigor.