Pepperdine private COC survey shows tighter
range of returns

How has the economic downturn affected the cost of capital in private markets? There’s some empirical data on lenders’ expected returns, thanks to I-banker Rob Slee’s on-going biennial survey, completed with Pepperdine University. The latest findings, as summarized in a recent article:

  • Banks.  Instead of lending 5 or 6 times EBITDA during peak times, banks are funding only half as much, based on asset values rather than cash flows. They are still a cheap source of private capital, averaging 6% to 8% for loans of $1 million to $5 million.
  • Asset-based lenders. Expected returns from Tier I loans (> $10 million) range from 8% to 10%; for Tier II ($2 million to $10 million) the range is 10% to 15%; and for Tier III (> $2 million) the expected return is well above 18%.
  • Mezzanine lenders. Because this debt is subordinated, often lacking personal guaranties (but with equity participation through warrants), these lenders demand higher rates—12% to 13%—for loans of $2 million to $10 million, a couple of points higher than a year ago.
  • Private equity. This lending is at an all-time low; PE groups want to see a 25% return on future funding, but expect only 10% on current investments.
  • Venture capital. VCs still expect to earn 40% to 45% on their limited partner interests, with higher returns for early-stage investments.

Slee is currently conducting the survey again (every six months), adding lawyers and business owners. He’ll also be speaking in Boston on Dec. 9th on the Private Cost of Capital Model. “This will be the first time I'll give guidance as to how to use the model,” he tells BVWire™. In the meantime, anyone who registers at will receive regular updates plus MidasNotes each Monday. “This is my written harangue as to what's happening in the economy,” Slee says. “My Note this week shows that the U.S. banking system is technically insolvent.”   

Bankruptcy court ‘on its own’ in valuing
mortgage portfolio

Cases spawned by the economic crisis are starting to come in.  Courts are already straining to find guidance when the question is asset values, but current markets are disrupted or dysfunctional and “may not fairly reflect the potential sale price of [the] asset,” writes Delaware bankruptcy Judge Christopher Sontchi in In re American Home Mortgage Holdings, Inc. (Sept. 8, 2009). In that case, “the court appears to be on its own” in determining whether “commercially reasonable….value” (Sec. 562 of the Bankruptcy Code) can be found only by reference to the market or by other, commonly accepted
valuation methods.

The court found credible guidance from the debtor’s valuation expert, who conducted an extensive, loan-by-loan DCF analysis to conclude that the portfolio was worth up to $1.16 billion. Further, a DCF is appropriate “in all conditions,” Sontchi said, even when markets are dysfunctional, because it values the asset’s continuing cash flows (to help discern the value of mortgages in particular, the court also cited Prof. Aswath Damodaran’s Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 2nd ed. 2001).

A complete abstract of this complicated case will appear in the December 2009 Business Valuation Update™, and the full-text of the court’s opinion will be available at BVLaw™.

Valuing distressed companies is good business
for appraisers

As the American Home Mortgage case shows, an unprecedented wave of impaired and distressed business valuations is about to flood the legal and economic landscape. Says Jim Alerding, “I’ve been in this business since 1980 and we’ve never really had a situation where there are so many businesses that are distressed or impaired at a single time.”

This Thursday, November 5th, Alerding will join appraiser James Ewart and I-banker Robert Shortle to present “Companies in Distress: Valuing the Impaired and Currently Unprofitable,” a BVR teleconference (2 CPE credits available). From selecting the appropriate premise of value to considering the impact of liquidity and current capital markets, the panel will provide the tools to value impaired businesses in today’s economy. To learn more or to register, click here.

Would you ever outsource ‘entry-level’ valuations?

Our good friend and BV consultant John Borrowman (Borrowman Baker LLP) recently received an inquiry from an overseas provider of “turn-key valuation and modeling services to CPA and valuation advisory firms.” The proffered services ranged from complete analyses, including exhibits and reports, to guideline company and transactions research for 409A engagements, FAS 157 (and 123R/141R/142), ESOPs, estate and gift tax, and “other requirements.” Are off-shore valuations inevitable? Silicon Valley VC firms may have started the trend, especially given their limited funds and the need to “pump out” 409A and 123R reports, Borrowman says.

While other accounting work is regularly sent offshore (the Big 4 apparently do quite a bit of this to save audit costs), few valuation engagements allow delegation—even when the staff are in the same office.  Summarizing this reality, Borrowman emphasizes “business valuation is a business of judgment.  The deliverable is, after all, referred to as an opinion. There has to be some limit to how much ‘cookie-cutter’ you can introduce into the process and still serve your client.” What’s your opinion? Email the editor with your comments and whether you’ve ever farmed out entry level assignments (or would consider outsourcing as an option), and we’ll continue the discussion next week.

‘Cooperation proclamation’ calls to litigation experts, too

It’s been one year since the Sedona Conference® issued its Cooperation Proclamation, calling on trial attorneys, financial experts, and other dispute professionals to “stem the rising tide of cost and burden threatening to undermine the civil justice system.” (For more on the current “explosion” of electronically stored information (ESI), see BVWire#77-1.)

So far, the Proclamation has attracted over 100 signed endorsements from state and federal judges and appeared in a least a dozen reported court decisions. Press coverage includes last week’s article in the New York Law Journal and at least one humorous take by an e-discovery blogger, touting the “great social benefits to this ESI ‘conflicts-gone-wild.’” On a more serious note, a federal judge recently called the Proclamation “the most important legal tech trend.” To mark the first anniversary, the drafters have issued a special Supplement to the Sedona Conference Journal (Vol. 10) devoted to the theme of “cooperation,” and are airing a webinar today on the Proclamation’s impact after one year. New free resource for experts: Are you prepared for the current information proliferation in litigation? If not, read the new article, “Explosion of Electronic Evidence Creates New Challenges for Experts,” now available as a free download from BVResources.

Free webinar on DLOM, restricted stock, and volatility

What’s the connection between discounts for lack of marketability (DLOMs) based on restricted stock studies and the volatility index (VIX)? Lance Hall, President of FMV Opinions, will be holding court on this topic and much more during a free webinar: Looking at the New Data in The FMV Restricted Stock Study™ and How to Use it!, next Wednesday, November 11th (1pm ET, 10am PT).

During this one-hour web-workshop, Hall will review new updates to The FMV Restricted Stock Study™ and how to use the data, with special focus on adjusting DLOM during periods of volatility. “Discounts over 50% are okay,” according to Hall, who will also provide a detailed case study for all participants, plus one CPE credit. Register here.

Updated Butler/Pinkerton presentation now available

This week we’ve posted the updated PowerPoint slides from Pete Butler’s presentation at the ASA’s BV Conference in Boston last month—in particular, his response to moderator Roger Grabowksi’s materials (introduced for the first time during the panel discussion) on total beta, total cost of equity calculations, and company-specific risk. These new slides are now available the special presentations/articles page. For more information on the Butler/Pinkerton Calculator, TCOE and Public Company Specific Risk Calculator ™,
click here.


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