Best Practices & Pitfalls in Valuations of Portfolio Companies April 22, 2015
The Panelists Anne Anquillare Noah Becker Steven Berman CEO, PEF Services LLC CFO, LLR Partners CFO, Argentum Group Melissa Brady, Director, Joseph Sjoholm Mark Heil, EVP McGladrey LLP Partner, McGladrey LLP PEF Services LLC (moderator)
Valuations Lessons learned for 2014 • Common pitfalls • Methodologies to produce independent valuations • What to look forward to in 2015 and beyond •
SBA vs. GAAP Valuation Policies SBA version more conservative that GAAP (some call it old • school GAAP) SBA version benefits – less volatility, easier to follow and • explain to investors SBA version limitations – institutions need GAAP based PCAPs • and could be a problem for next fundraising
SBA vs. GAAP Major Differences SBA GAAP Market participant assumption sales today Cost based Interest rate impact review required No adjustment for interest rates No “arbitrary” delay in marking to market Two year wait for appreciation No discounts Discounts allowed (e.g. liquidity)) Warrants require BS or OPM valuations Warrants valued at intrinsic value FMV applied to all assets and liabilities Valuations applied to investments
Limited Partners Complaint: significantly different valuations for commonly • held assets in different funds Not all investors have the same needs • Great GASB – monthly reporting?!! •
“ How do you justify variations in im plied equity value from original cost? When is an appropriate tim e to w rite-up or w rite- dow n an asset?”
“ For a future trade sale, should expected value be run through the w aterfall at the sale date and then discounted to present value -- or -- should the expected value be discounted to present value and allocated through the w aterfall at the valuation date?”
“ References to EBITDA m ake us shudder … We’re very suspicious of accounting methodology that is vague or unclear, since too often that means management wishes to hide something.” ~ Warren Buffet in a 2000 newsletter to Berkshire Hathaway clients, but reiterated numerous time in the media as late as 2014
Governance & Technology Who is involved in the valuation process • Documentation • Written valuation policy • Policy changes and LP communications • Role of technology •
Regulatory Concerns re: Valuations SEC deficiency letters • Relying on third party valuations • Valuations and fund marketing materials •
University of Oxford Study Reviewed 761 fund investments made by CALPERS • Conclusions: • There are significant jumps in valuations in the fourth- • quarter, when funds are normally audited. When fundraising, valuations and reported returns are • inflated with gradual reversal once the follow-on fund has been closed. Performance figures reported by funds during fund- • raising have little correlation to ultimate returns.
SEC Enforcement Action SEC charges Patriarch Management for improper valuations • SEC alleges Patriarch violated fiduciary duty to clients by failing • to disclose subjective discretion over valuation levels
2015 and beyond New practice guidance due out in 2016 • Complexity and regulation driving use of 3 rd party valuation for some • assets Moving targets on “best practices”, regulation and investor expectations • Continued areas of concern • Inconsistency between GAAP and “actual” • Concerns over quality of inputs (portco financials, ownership, • preferences) Recommendations • November planning meeting • Fair Value committee at firm (make valuations an exercise the whole • firm is involved in)
Thank You Argentum Group LLR Steven Berman Noah Becker 212-949-8511 215-972-2572 sdberman@argentumgroup.com nbecker@llrpartners.com www.argentumgroup.com www.llrpartners.com PEF Services LLC PEF Services LLC Anne Anquillare Mark Heil 212-203-4681 212-203-4679 anne@pefundservices.com mark@pefundservices.com www.pefundservices.com www.pefundservices.com McGladrey LLP McGladrey LLP Joseph Sjoholm Melissa Brady 212-372-1186 212-372-1296 Joseph.Sjoholm@mcgladrey.com Melissa.Brady@mcgladrey.com www.mcgladrey.com www.mcgladrey.com
Recommend
More recommend
