Setting exit multiples directly

GPs that are used to deterministic Excel based models where may want to just set a fixed Exit multiple, and forecast fund performance based on this number. There’s a few reasons why we don’t support this methodology.

We want to emphasize there is no right or wrong way to do portfolio construction. There are only approaches that are flexible and inflexible. A flexible approach has the advantage of giving the GP multiple levers to pull to run varied construction strategies.

The problem with setting an exit multiple is:

• It hides away a market dynamics i.e. what are the actual valuation step-ups in the market? By sector or by geography?

• It hides away probability of early exits at lower multiples.

• It hides away impact of follow-ons, which frequently end up reducing the exit multiple.

• The final power law curve for the fund is an input, not an output.

In Tactyc we build up to the exit multiple from more granular assumptions such as graduation rates, exit rates, valuations. At each round, we want you to consider what the average valuations look like (based on market data), how many companies make it to that round and how many companies exit. This is frequently informed by the performance of your past funds + market benchmarks.

We also take into account your follow-on investments to determine what the expected MOIC looks like. Tactyc puts it all together to calculate the expected exit MOIC in for each of your allocation.

While this approach requires a bit more thought than plugging an exit multiple, it results in a model that:

• is more defensible to LPs as its supported by actual market data and your investment strategy

• later in your fund’s life, it enables you to see where you are going wrong i.e. did you assume the wrong graduation rates, investment levels or market valuations? It enables you to better course correct your fund strategy.