The Probability-Weighted Expected Return Method (PWERM) values equity in a private company by modelling a small number of discrete future exit or liquidity scenarios, such as an IPO, a trade sale, staying private or liquidation. It assigns a probability to each, allocates the proceeds of each scenario across the share classes, and discounts the probability-weighted result to today.
When to Use the PWERM
- Venture-backed and pre-IPO companies with preference shares and complex capital structures
- Fair value of preferred and ordinary shares for fund reporting and financial statements
- Share-based payment valuations (IFRS 2) and US 409A valuations, when exit routes are reasonably foreseeable
- Companies approaching a specific event, such as a planned IPO or sale process
How the PWERM Works
- Define the scenarios: for example, an IPO in two years, a strategic sale in three years, remaining private, or a downside liquidation.
- Estimate the equity value in each scenario at the exit date, using multiples, DCF or expected transaction proceeds.
- Apply the waterfall: allocate the proceeds to each share class according to liquidation preferences, participation rights and conversion terms.
- Assign probabilities based on management plans, market conditions and the company's stage. The probabilities must add up to 100%.
- Discount each class's expected proceeds to the valuation date at an appropriate risk-adjusted rate.
- Apply a DLOM where required for minority, illiquid interests.
Strengths and Limitations
Strengths: the method explicitly reflects how each share class participates in different outcomes, and it is intuitive for boards and investors. Limitations: it depends on judgement about the scenarios and probabilities. It is often combined with an option pricing method (a hybrid approach) when outcomes are less clear.
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Valtech Valuation is an independent valuation and transaction advisory firm with offices in Hong Kong and Singapore. Public companies, private businesses and multinational corporations rely on our valuations for financial reporting, transactions, fundraising and disputes. Our clients range from Fortune 500 companies, listed groups and US-listed firms to private equity funds, family offices and high-growth startups, across Hong Kong, Mainland China, Singapore, Southeast Asia, the Middle East and the United States.
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- Independent and defensible conclusions: objective, well-documented reports prepared to withstand audit, regulatory and investor scrutiny.
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- Proven with listed and multinational clients: experience supporting publicly listed groups, US-listed firms and Fortune 500 companies.
- International reach, local expertise: offices in Hong Kong and Singapore serving startups and funds across Asia, the Middle East and the United States.
- Complex capital structure expertise: precise waterfall modelling for preference shares and convertibles.
- Multi-disciplinary qualified team: accounting, finance, risk management, surveying and business valuation professionals on every engagement.
Professional Credentials of Valtech's Team
- PhD holders
- Certified Public Accountants – CPA (HKICPA)
- Chartered Financial Analysts – CFA
- Financial Risk Managers – FRM (GARP)
- Chartered Valuation Surveyors – MRICS (Royal Institution of Chartered Surveyors)
- Accredited in Business Valuation – ABV (AICPA)
- Certified Valuation Analysts – CVA (Singapore)
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