Best Practices & Pitfalls in Valuations of Portfolio Companies - - PowerPoint PPT Presentation

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 im plied equity value from

• riginal 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

• 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 sdberman@argentumgroup.com www.argentumgroup.com PEF Services LLC Anne Anquillare 212-203-4681 anne@pefundservices.com www.pefundservices.com LLR Noah Becker 215-972-2572 nbecker@llrpartners.com www.llrpartners.com PEF Services LLC Mark Heil 212-203-4679 mark@pefundservices.com www.pefundservices.com McGladrey LLP Joseph Sjoholm 212-372-1186 Joseph.Sjoholm@mcgladrey.com www.mcgladrey.com McGladrey LLP Melissa Brady 212-372-1296 Melissa.Brady@mcgladrey.com www.mcgladrey.com