Study Of Pricing Method In Private Equity Based On Analytic Hierarchy Process

In1976, the first Private Equity fund, Kohlberg Kravis Roberts, also known as KKR was established in the United States. Decades later, now there are thousands of private equity firms around the world, which have become a significant financing means, only second to the bank loans and IPO. Meanwhile, PE fund plays an important role in enterprise management, resource allocation and even industrial upgrading with its unique and spontaneous power overseas. But China’s PE doesn’t have a long history. In the early1990s, the first PE in China named Zibo Fund was founded. But during the development, the irregularity and other problems had been gradually exposed, which caused the industry stagnated for over ten years. Domestic private equity firms began its rapid development since2004, during the last decade, the annual scale has roared up from1.67billion USD to34.5USD, which injected strong power into the whole rapidly developing economy and a large number of small and medium-sized enterprises full of innovative vitality. The rise of PE fund also provided the huge amount of idle fund with more diversiform, more flexible, and more profitable investment channels.But behind the delightful prosperity, there are still many problems remained to be solved. Among them, the valuation of target enterprise, as a core of the PE process, has encountered some trouble. Classical valuation models, such as the cash flow method, the relative valuation method and so on, due to its own defects and incompatibility with China’s capital market, become formalism in some institutions. Subjective opinions and empiricism plays an important part in the assessment, and they make decisions based on this. This kind of actions brings difficulties in realization to more investments, puts them in dilemma, and makes investors burden risks more than they deserve. In organizations that use classical evaluation methods, managers tend to adopt the method in an extensive or even wrong way, which is highly possible to cause evaluation deviation, and the investment may come to nothing. Therefore, an objective, fair and reasonable evaluation for the enterprise has become the core of private equity investment process.Based on the theory of private equity investment and researches of the evaluation methods home and abroad, we analyze the classical enterprise valuation methods, and conclude both their significance and deficiency at present. And then by Analytic Hierarchy Process (AHP), from the two aspects which are profitability and risk, we establish a set of enterprise value assessment system. Meanwhile, through a broad access of information, we gain an insight into the running tendency and development trend in the economy, carbon industry and company S. Compared to the representative enterprise-Fangda Carbon New Material Technology co,. Ltd, we add optimization and adjustment to a certain valuation method, and then use this improved approach to evaluate company S, we hope to come up with some objective, reasonable and effective advice to the practitioners in the PE industry.The main achievement of this study is the Enterprise Value Assessment System. The system is established for PE investors, and no matter what method-DCF or Market Approach-they choose to use, the system is able to provide a tool that can make plain expressions by quantifying and systematizing the process of evaluating target enterprise. But there are still some drawbacks. The idea of Delphi Method was used in the part when we need to assign weights to the indexes, which contains subjectivity, and the same problem appeared when we applied the system to our target in case study. Subjectivity is inevitable in investment behavior, but measures can be taken to reduce the negative impact, I look forward to new ideas that may improve this issue in the follow-up study.