What Is The Fair Price?

Private Markets (By Travis Miller, 5th June 2018)

I get asked this question all the time.  What is the fair price of direct investing in a derivative, complex derivative, private market debt / equity?

My typical response is not dissimilar to an economist; It depends!

The reality is that Private Markets investments are hard to price, value, trade, understand and extremely easy to enter and exit at the wrong price!!

At a high level;

  • Spreadsheets give you an OK price on a simple derivative, although how do you know what to plug in?  What is the Vol, Forward, Rate etc...
  • Roughly the same goes for complex derivs, although requires you to ramp up the guess work.  What are the correlations, FX, default probabilities etc...
  • Private Markets are just as complex, should the yield be 15%, 10%, 5%, should the IRR be 10%, 25%, 50%?

The reality for most investors is that you will typically have asymmetric access to information and even with the best model, without the inputs and knowledge you will be flying blind.

I could probably solve for a fair price most of the time and give you a better answer, although the best advice I can give people is as follows;

  1. If you are getting a price from 1 provider you are probably NOT getting a fair price.  (If there is only 1 mechanic in town, will they give you a sharp quote?)
  2. For derivatives request 2-3 prices on the same terms at the same time (or worst case tell the 1 provider you are getting 2-3 prices!)
  3. For private markets life is harder as less commoditised, so;

a) Co-invest on the same terms with an experienced investor to offset the asymmetric access to information; and/or;

b) research market comparables as there is an endless supply of information out there, then position investment on a risk continuum.

c) check the fees, the difference between a good risk v return trade is quite often the fee structure.

d) If you can get access to the key principals, do you trust them, are they experienced and what skin do they have in the game.

At iPartners we overlay a number of additional detailed screens, although the first stage of filtering an investment can be as simple as the above.