A recent purchase price can be one of the most useful valuation references available. This is particularly true when the parties completed the transaction through an orderly, arm’s-length process. The transaction should also be close to the valuation date and involve the same instrument being valued.
An actual transaction may provide the most direct evidence of value for hard-to-value positions. These may include private credit, preferred equity, warrants, litigation claims, and trade claims. In many cases, a transaction can be more relevant than public-company comparables or valuation models. Those approaches may only approximate the instrument’s specific terms and risks.
However, purchase price does not automatically determine fair value. The transaction must be evaluated in context. The central question is whether it provides reliable evidence of the asset’s value as of the valuation date.
When Purchase Price Carries the Most Weight
Purchase price generally carries the most weight in a functioning market. It is also more persuasive when commercially sophisticated parties completed the transaction.
The parties should have had access to relevant information. They should also have negotiated at arm’s length and realistically assessed the available alternatives.
A transaction process does not need to be perfect for its price to remain relevant. Instead, the key question is whether any limitations materially weaken the transaction as an indicator of value.
Testing the Price at Each Valuation Date
The analysis does not end when the transaction closes. Purchase price is a starting point, not a permanent conclusion.
At each valuation date, the analysis should consider whether circumstances have changed. Relevant developments may include borrower performance, credit spreads, restructuring activity, collateral coverage, liquidity, and subsequent transactions. The analysis should also consider any other factors that may affect value.
The nature of the original transaction also matters. A competitive or meaningfully negotiated process generally produces stronger evidence of value. A transaction among existing holders or related parties may carry less weight. Similar concerns may arise when the parties face financing or liquidity pressure.
Therefore, a completed transaction does not, by itself, establish that the original price remains the appropriate mark in later periods.
Using Purchase Price as a Valuation Anchor
Our approach is to use a recent, directly relevant transaction as a strong valuation anchor. We then test that anchor at each measurement date.
When new objective evidence supports a change, the valuation should change. When the underlying facts have not changed meaningfully, retaining the purchase price may be the most supportable conclusion.
This is especially true when contrary indications are less direct or rely more heavily on assumptions. They may also be less closely connected to the actual instrument.
Documenting the Conclusion
Strong valuation support should do more than state that the analysis used purchase price. It should explain why the transaction remains relevant and what subsequent developments were considered.
The documentation should also identify any contrary evidence that the analysis evaluated. Finally, it should explain why that evidence did or did not support a change.
That discipline is especially important when valuing illiquid positions with limited observable market inputs.
In those situations, purchase price is not simply the easy answer. When properly evaluated, tested, and documented, it may be the best answer.