Public markets are easy, at least in one way. There’s always a price flashing on the screen, so you know what the market thinks a company is worth. You can debate whether it’s right, but the number’s there. In private markets, you don’t get that luxury. You have to build your own price.
In private equity, that usually starts with a cash flow forecast. You try to figure out how much money the business is going to make over the next five or ten years, and then you discount that back to today. Think of it like this: would you rather have a dollar now or a dollar in five years? You’d take it now, unless someone compensates you for waiting—and for the risk that something goes wrong in the meantime. That’s what the discount rate is doing.
This method, called discounted cash flow or DCF, is popular because it puts cash at the center of the valuation. But it’s also very sensitive to assumptions—growth rates, margins, capex, and exit values all matter. That’s why institutional investors always cross-check their DCFs with comparables. They look at similar companies that have sold recently or are trading publicly and ask: what kind of multiple is the market paying for these earnings or revenues? If your DCF says a company is worth $500 million but the market is paying $800 million for every other firm like it, something might be off.
And if it’s a leveraged buyout, the modeling goes even deeper. Now you’re not just thinking about value, you’re thinking about capital structure. How much debt can this business support? Can it service interest payments under different scenarios? What kind of exit multiple do you need to hit a 20% internal rate of return? These models aren’t just for fun—they’re central to the investment thesis. If the numbers don’t pencil out, the deal doesn’t happen.
Credit investors see the same company through a different lens. They’re not looking for upside—they’re trying to avoid downside. Their job is to figure out: will this company pay me back? And what happens if it doesn’t?
Valuation in credit revolves around yield and risk. A lender will look at the interest rate on the loan, compare it to a benchmark like SOFR, and ask whether the spread justifies the risk. But “risk” isn’t a single number—it’s a mix of things. What’s the company’s leverage? How volatile are its revenues? What covenants are in place to restrict risky behavior? If things go bad, how much of the loan could be recovered? Lenders will build scenarios where revenues fall, EBITDA contracts, and liquidity dries up—and then they check how far down the capital structure they are.
This is where the landscape starts to widen. Some lenders focus on large syndicated loans to sponsor-backed companies. These are usually arranged by investment banks and end up in the hands of CLOs or mutual funds. Others operate in the direct lending world—private funds that structure bespoke loans for middle-market firms. And then there are BDCs, which are publicly traded vehicles that behave a lot like private credit funds but serve retail investors and often target smaller borrowers.
Each of these lenders has their own tolerance for risk and return. But they all care about the same core issue: can the borrower generate enough cash to stay current, and what happens if it can’t?
What ties private equity and private credit together is that they both operate in a world without public pricing. Every deal is a custom job. Every valuation is a hypothesis. And every model is only as good as the assumptions you feed it. There’s no ticker to fall back on—just spreadsheets, judgment, and a deep understanding of how businesses behave under pressure. That’s why in this world, valuation isn’t a number. It’s a conversation.