10 Session 1: Course Intro · Why Private Market Valuation Is Broken
| Unit | 1 — Why DCF Fails |
| Book Chapter | 1 (sections 1.1–1.4, 1.10–1.16) |
| Track | Common core (both tracks) |
| Assessment milestone | PS1 drops |
10.1 Learning Objectives
By the end of this session, students will be able to:
- State the scale of the private capital market ($13 trillion AUM, ~10,000+ funds) and articulate why valuation methodology matters at this scale.
- Describe how DCF is applied to private market assets in current industry practice, including the typical structure of a discount rate (risk-free + ERP + size + illiquidity).
- Preview the GE-LAV® valuation hierarchy (DCF ⊊ LAV ⊊ GE-LAV) and the five main results of the GE-LAV framework.
- Identify that the illiquidity premium is the critical and problematic component of the DCF discount rate.
- Commit to a course working agreement: track preview, assessment expectations, AI use policy, project orientation.
10.2 Pre-Class Assignment
- Read: Book Preface + Chapter 1, sections 1.1–1.4 (~25 pages)
- Read: Course syllabus and Tracks page in full
- Optional: Skim Preqin Global Private Capital Secondary Market Report Q4 2024 (link on course site)
10.3 In-Class Outline (75 minutes)
| Time | Segment | Format |
|---|---|---|
| 0:00–0:10 | Course welcome · instructor intro · agenda for the semester | Lecture |
| 0:10–0:20 | The scale of the problem: why $13T at stake | Lecture + visuals |
| 0:20–0:35 | How DCF is applied to private assets in current practice | Lecture |
| 0:35–0:45 | Why the illiquidity premium is the problematic component | Lecture + discussion |
| 0:45–0:55 | Preview: the valuation hierarchy and 5 main results | Lecture |
| 0:55–1:05 | Course logistics: tracks, assessments, AI policy, project | Lecture + Q&A |
| 1:05–1:15 | Discussion: “Where in your career will you encounter this?” | Discussion |
10.4 Discussion Questions
For the last 10 minutes of class. Choose 2–3 depending on time:
- The Black-Scholes-Merton option pricing formula was published in 1973 but not adopted by major investment banks until the late 1980s. What lessons does this hold for GE-LAV’s path to adoption?
- If you were a CIO of a $50B pension fund and learned that GE-LAV implies your private market portfolio is overvalued by 15% in current conditions, what would you do? What would the constraints be?
- IPEV guidelines and IFRS 13 embed DCF-style methodology. Is changing the methodology a technical problem or a political/coordination problem? Both?
10.5 Worked Example for the Lecture
The Infrastructure Mispricing Example. A 20-year infrastructure asset with $50M annual contracted cash flows.
| Method | Discount rate | PV |
|---|---|---|
| DCF (constant 7.5%, illiq premium 3.5%) | r = 7.5% | $103.6M |
| LAV (Jensen-corrected, normal markets) | r ≈ 7.7% | ~$108M |
| GE-LAV (normal markets) | r ≈ 8.4% | ~$95M |
| GE-LAV (GFC depth, L = −1.5) | r ≈ 32.3% | $30.9M |
10.6 What to Expect Next Session
Session 2 unpacks each of the three structural failures in detail. We’ll cover:
- The secondary market data that proves the premium is stochastic
- The mathematics of Jensen’s inequality and why convex discount factors create systematic bias
- The McKean-Vlasov externality — what it is and why it makes liquidity a collective phenomenon, not an individual asset property
- The Liquidity-Adjusted CAPM as a connection to the portfolio theory students already know
Reading: Book Chapter 1, sections 1.5–1.7. Skim sections 1.8–1.10 (the worked example).