Valuing the true worth of private companies is a well-known issue in corporate finance. Given the current context, particularly the boom in investing in private companies, this issue becomes increasingly relevant. Investment divisions of family offices are seeking a universal method for valuing private companies. Family offices use a range of methods for valuation, which require certain assumptions and caveats. 

To execute a client's investment strategy effectively, despite constantly changing market conditions, family offices need to analyze company data to forecast profit growth. An investor’s insufficient understanding of their financial capabilities can lead to situations where participating in the next project is unaffordable. Additionally, every asset is evaluated relative to the existing portfolio of assets. The investment division of a family office controls and rebalances the portfolio so that each dollar is spent within the client-approved investment strategy. This is not always an investment declaration with written goals, tasks, and permissible deviations; often, it's more an understanding formulated by the investor together with their family office.

The main difficulty is that private companies do not disclose information, and minority owners rarely have a place on the Board of Directors or even the right to information. This leads to the risk of incorrect valuation. However, these risks can be partially mitigated through the professional expertise of investment divisions of family offices. Therefore, choosing a family office should consider the experience and business reputation of its entire investment team.

How do family offices value private companies? The main principle is to use different metrics and sources of information, which together can give an objective valuation.

Valuation involves subjective assessment when modeling a company's future cash flow or analyzing similar transactions. However, this analysis may also not reflect the real market value of assets. For young companies that do not generate positive cash flow and do not have an observable market value, the likelihood of erroneous valuation is higher. Consequently, valuation is challenging, its results may be inaccurate, and this can significantly affect the difference between expected and actual investment returns.

To evaluate a proposed investment and revalue an existing client portfolio, family offices analyze the history of a public company's value, which can be compared with the company, and find out the value after the last round. For example, an investor bought shares at a company valuation of $700 million, and within a quarter, the company raised a new round at a valuation of $2 billion. Consequently, the unrealized value of the share package has increased. But also the investor's shares were diluted. There is also a secondary market for shares, where brokers can buy and sell shares of private companies. Family offices usually receive a list of shares for buying and selling from several brokers and see the change in the price of securities. Family offices use this method only to value private companies for the purpose of determining client wealth.

In addition, investment teams of family offices need to timely evaluate returns, consider purchases, commissions, and monitor the distribution of client assets – that is, to keep their finger on the pulse. For such complex and deep analytics, more serious tools are needed than standard broker interfaces. Here, technological innovations come to the aid of family offices, which collect data and offer to use their platforms for managing a portfolio of private companies. And, I think, the future lies in this direction. The collected data will first help systematize all assets, and the next step will create a huge secondary market, if it allows not only to store and monitor assets in the portfolio but also to make transactions, under certain conditions and in compliance with legislation.