new best practices & pitfalls in valuations of portfolio companies · 2015. 5. 15. · best...
TRANSCRIPT
Best Practices & Pitfalls in Valuations of Portfolio Companies
April 22, 2015
The Panelists
Anne Anquillare CEO, PEF Services LLC
Noah Becker CFO, LLR Partners
Steven Berman CFO, Argentum Group
Melissa Brady, Director, McGladrey LLP
Joseph Sjoholm Partner, McGladrey LLP
Mark Heil, EVP 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
Cost based
No adjustment for interest rates
Two year wait for appreciation
Discounts allowed (e.g. liquidity))
Warrants valued at intrinsic value
Valuations applied to investments
GAAP
Market participant assumption sales today
Interest rate impact review required
No “arbitrary” delay in marking to market
No discounts
Warrants require BS or OPM valuations
FMV applied to all assets and liabilities
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 implied equity value from
original cost? When is an appropriate time to write-up or write-
down an asset?”
“For a future trade sale, should expected value be run through the waterfall at the sale date and then discounted to present value
-- or -- should the expected value be discounted to present value and allocated through the waterfall at the valuation date?”
“References to EBITDA make 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
• Who is involved in the valuation process
• Documentation
• Written valuation policy
• Policy changes and LP communications
• Role of technology
Governance & Technology
• SEC deficiency letters
• Relying on third party valuations
• Valuations and fund marketing materials
Regulatory Concerns re: Valuations
• 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.
University of Oxford Study
• SEC charges Patriarch Management for improper valuations
• SEC alleges Patriarch violated fiduciary duty to clients by failing to disclose subjective discretion over valuation levels
SEC Enforcement Action
• New practice guidance due out in 2016 • Complexity and regulation driving use of 3rd 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)
2015 and beyond
Thank You Argentum Group
Steven Berman 212-949-8511
[email protected] www.argentumgroup.com
PEF Services LLC
Anne Anquillare 212-203-4681
[email protected] www.pefundservices.com
LLR Noah Becker 215-972-2572
[email protected] www.llrpartners.com
PEF Services LLC
Mark Heil 212-203-4679
[email protected] www.pefundservices.com
McGladrey LLP Joseph Sjoholm
212-372-1186 [email protected]
www.mcgladrey.com
McGladrey LLP Melissa Brady 212-372-1296
[email protected] www.mcgladrey.com