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.

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.

"The market has moved"

This is the most common answer. And look - it's sometimes legitimate. Private company valuations do move with public market indices and sector multiples.

Your response should be simple: "Show me." Ask them to demonstrate which index or peer basket they're tying their marks to, and how this specific company's KPIs justify moving in line with - or above - that basket. If software multiples expanded by 2 turns but this company's growth rate declined, why should it get the same benefit? Make them walk you through the connection between market movement and company-specific performance.

"But we're bigger now; we command a higher multiple."

Fair point - scale premiums are real. Larger companies often do trade at higher multiples than smaller ones due to lower risk profiles, more diversified customer bases, and greater market presence.

But here's the key: quantify it. How much of the markup is attributable to scale versus pure multiple re-rating? If the company went from $200M to $350M in revenue, does that justify a full turn of expansion? Half a turn? Get them to break it down. Scale premium isn't a blank check - it should be measurable and defensible.

"But we've fundamentally improved the quality of the business."

This is actually the best defense, because quality improvement is a legitimate driver of multiple expansion. If they've re-platformed the technology, professionalized the management team, or transformed the business model, that should command a higher multiple.

The test? Measure it. Ask them to tie the multiple expansion to specific KPI improvements:

Every 0.5 to 1.0 turn of multiple expansion should map to concrete operational improvements. If they’ve marked it up by 1.5 turns, you should see 1.5 turns of improvement in the numbers.

If a GP can bridge the markup with data - showing you the market movement, the scale impact, or the operational improvements that justify the revaluation - that's actually a good sign. It means they're thinking rigorously about valuations and can defend their marks.

If they respond with vague narratives, directional statements, or appeals to "market conditions" without supporting data, you have your answer. The marks are probably aspirational, not analytical.

Here's a is something I saw again and again: the best-performing managers often mark the valuation multiple of their winners down, not up - even when in fundraise.

Think about the incentives. If you're a GP sitting on a portfolio that's genuinely performing well within the 1st quartile, you have every reason to be conservative with your marks. You know you’ll raise your fund at the hard cap, and you'd rather carry that breakout company at 4x and celebrate a 10x realization at exit, than carry it at 10x and have to explain to your LPs why it didn’t return more.

Top managers play the long game. They know their track record speaks for itself, and they'd rather under-promise and over-deliver than face uncomfortable questions about why marks didn't translate to realizations.

We are now at the end of our 2 part series on the Entry Multiple, so here’s a quick recap. When you're conducting GP diligence, add this to your process:

In my experience, if 50%+ of the portfolio shows systematic expansion without underlying growth, that's not valuation discipline - that's window dressing for fundraising.

As an LP, you'll never have perfect information about portfolio valuations - that's the nature of private markets. But you can build tests that separate signal from noise.

Your job isn't to be the valuation police. It's to back managers who value intellectual honesty and long-term credibility over short-term optics.

The Entry Multiple Test won’t tell you everything - but it tells you enough to know who’s being honest. And in a 10-year partnership, that’s the foundation you want.

If you enjoyed this newsletter, I’d appreciate it if you would forward it to a colleague or friend. If you’re that friend, welcome!