TAF’s ‘Best Practices’ Draft is now available for review
On June 10th, The Appraisal Foundation (TAF) released its 40-page Discussion Draft on Best Practices for Valuation in Financial Reporting: The Identification of Contributory Assets and the Calculation of Economic Rents. The Draft is posted to TAF’s homepage www.appraisalfoundation.org in the "News" section of the page.
This document is intended to present preferred methods of addressing certain situations in the valuation of intangible assets using the Multi-Period Excess Earnings Method. However, these are not intended as standards; facts and circumstances may indicate departure from the recommendations of this document.
TAF is asking that all interested parties provide comments on this Draft by July 22, 2008 by sending feedback to commentsCACs@appraisalfoundation.org. All written comments will be posted on TAF’s website for public viewing. If you have any questions about the Draft, contact TAF’s Executive Administrator Paula Douglas at firstname.lastname@example.org.
Transfer Pricing Increasingly Concerns Authorities
Because multi-national companies can manipulate transfer prices on services or goods sold to another entity within the corporate family to reduce tax liability, the issue of transfer pricing is increasingly becoming a concern for fiscal authorities. These manipulations have led to the rise of regulations and oversight, making transfer pricing a serious compliance issue for multi-national companies and the experts engaged to properly value the true cost of the transferred services or goods. What works for valuation purposes doesn't necessarily work for transfer pricing, and vice versa.
To help valuation experts further their training in this area, BVR is conducting a teleconference with experts Mark Fidelman, VP of The Ballentine Barbera Group, a CRA International Company (moderator), Dr. Elena Khripounova, Southeast Director of Transfer Pricing at Grant Thornton LLP, John M. Breen of Caplin & Drysdale, Chartered (formerly with the Office of Chief Counsel at the IRS) and Perry Urken, VP of The Ballentine Barbera Group, a CRA International Company. These experts have come together for an information-rich, 100 minute teleconference that will deliver a practical introduction to and overview of transfer pricing.
Along with a detailed presentation of transfer pricing concepts, the regulatory context, and the most relevant analytical approaches employed for transfer pricing, the panel will outline areas of potential tension between valuation and transfer pricing. Case studies of familiar valuation scenarios relating to intangibles, but from transfer pricing perspectives, will highlight their commonalities and differences. As always, you’ll have the chance to interact directly with the experts. The teleconference is tomorrow (Thursday, June 19) at 10am PT, 11am MT, 12 noon CT, and 1pm ET. To register, click here.
'Great opportunity that needs to be cultivated'
That’s how Dr. Susan Mangiero AIFA, AVA, CFA, FRM, described the business valuation opportunities in the hedge fund industry to an attentive crowd at last week’s Introduction to Hedge Fund Valuations at the NACVA conference in Las Vegas. In this relatively new industry, she warned that valuing hedge funds “can bring about a lot of liability to third parties such as appraisers” but offers “a good opportunity if you’re comfortable with the risks.”
There are 9,000+ hedge funds around the world, many in great need of help with valuation issues. New regulations and accounting rules encourage or mandate the use of a third party to price a portfolio (or components thereof). Other situations such as divorce, succession planning or partnership disputes, require a valuation of the business itself. Other hedge fund managers need input in order to effectively develop and implement valuation policies and procedures.
Regardless of the scope of work, hedge fund valuation work presents some unique challenges, particularly the following four items. First, hedge fund strategies are diverse and sometimes described as arcane, especially when derivative instruments are present, directly or as part of complex securities. Second, hedge fund structure varies, often established as an offshore entity. Third, many hedge funds are loathe to disclose position details or have outsiders spend time with traders or key investors. Fourth, hedge fund benchmarking information is not created equal and requires careful analysis.
As with other BV techniques, it’s important to rely on data that’s properly matched to the subject industry, consists of an adequate sample size, and is of high quality and current to your engagement. Valuation is integral to proper risk management. As more pension plans, endowments and foundations invest in hedge funds, the business valuation professional has an opportunity to help managers and investors alike by (a) raising the “best practices” bar, (b) adding discipline to the appraisal process and (c) encouraging the mitigation of operational, financial and compliance risks.
Want to win an iPod Nano loaded with your choice of three BVR teleconference recordings? In an effort to further develop thought leadership in the area of hedge fund valuation, we’d appreciate a few minutes of your time in answering a 15-question survey developed by Dr. Mangiero. Whether you are already involved in hedge fund and derivative instrument valuation work or are interested in learning more about this important area, we’d love to get your input. Your responses will be used to better focus information to assist business valuation professionals who work (or want to work) with hedge funds. Click here to take the survey. (If you experience any difficulty, copy and paste this URL into your browser’s display line – http://www.zoomerang.com/Survey/?p=WEB227VRUND29S). The drawing for the iPod Nano winner will be held on July 1st.
For more information on hedge funds, you may want to visit sites such as www.hedgeworld.com, www.hedgeco.net, www.pensionriskmatters.com (click on the Hedge Fund and Valuation folders on the left hand side), www.pensiongovernance.com, or www.seekingalpha.com.
'A reduction of values? Not yet.'
Dexter Braff (Braff Group, Pittsburgh) responded to the June 4th BVWire article titled "Slee on the ‘new math’ of M&A" that discussed Rob Slee’s (Robertson & Foley) Midas Manager blog and Slee’s observations of a reduction in EBITDA market multiples. Braff wrote:
While I agree that the availability of debt capital can impact a buyer’s ability to finance a transaction, I think it’s important to point out that this does not impact the underlying value of the entity, rather the number of buyers who have the financial wherewithal to complete the deal. While I recognize that if fewer buyers are capable of completing a deal, the reduced demand can constrain the ultimate value a seller can receive, that’s a function of supply and demand, relating more to investment values than fair market value.
I’d like to also point out that for attractive properties, we have seen buyers more than willing to ante up additional equity to bridge any shortfalls in debt financing to complete a deal. This has been particularly true for Private Equity buyers who have a surplus of capital to invest that they still want—and need to—deploy.
From a practical perspective then, as investment bankers who specialize in middle market health care services, we have not yet seen a slowdown in deal flow, nor have we seen a reduction of multiples, which, for our most attractive sectors, remain in the 6-10 times EBITDA range, or more. More equity? Yes. More creative sourcing of debt? Absolutely. But a reduction of values? At least not yet.
Send comments about your observations of market multiples to email@example.com.
Between comic and dangerous
You can’t do it alone. Leaders of the BV profession can all recount stories of lawyers—and judges—whose understanding of appraisal fundamentals seemed somewhere between comic and dangerous. BVR has been trying to bridge that gap by bringing lawyers and business appraisers together whenever we can. The joint BVR/ASA Divorce: A Hands-On Workshop for BV Practitioners, hosted by Jay Fishman and Bill Morrison, is one example. A second is the University of San Diego School of Law Summit on DLOM, hosted by Judge David Laro and Mel Abraham, and produced by BVR. The editors of BVWire thought readers might enjoy a very short video we produced to market BVR events to lawyers (and of course feel free to share the link with your lawyer friends!). We hope this doesn’t seem too familiar to any of you!
Inflation will average 2.5% over the next 10 years...?
Given the current state of the economy and the dramatically rising food and gas prices, do you feel the inflation rate will only average 2.5% over the next 10 years? According to the 34 participants (who are economists from industry, government, banking, and academia) in the June 2008 Livingston Survey, this will be the case. Their predictions for long-term inflation (measured by the consumer price index) continue to hold steady at 2.5%, as the number has been unchanged in the last 14 semiannual surveys dating back to December 2001. As always, please send your thoughts on this or any other Wire article to firstname.lastname@example.org.
The forecasters’ views of long-term output growth were slightly lower, as the panelists believe real GDP will grow 2.7% annually over the next 10 years, down from 2.9% in the December 2007 survey. The latest numbers from the Livingston Survey, as well as Duff & Phelps’ historical equity risk premiums, Ibbotson’s equity risk premiums and the Abbott Liquidity Factor™ can be found monthly in the Cost of Capital and Discount Metrics sections of every Business Valuation Update™ newsletter. As always, please send your thoughts on this or any other BVWire articles to email@example.com.