Hedge fund valuation survey results

Business Valuation Resources and Pension Governance, LLC just completed a joint survey on BV firms currently providing valuation services to hedge fund clients—and it appears that relatively few hedge funds are reaching out to the BV profession, despite regulatory and legal pressure to do so. Some highlights are summarized below:

  • Only 28% of appraisers with hedge fund clients are registered with the SEC.
  • Appraisers with hedge fund (defined as funds of funds for the sake of this survey) clients say that 55% of the funds have a formal valuation process in place.
  • Almost half the hedge funds generate valuation numbers internally, and a quarter rely on third party administrators.  Relatively few used certified business appraisers.
  • Many reasons were given as to why hedge funds procure a valuation. These include, but are not limited to: auditing (33% of respondents), asset allocation (27%) and performance reporting (24%), redemption (18%) and risk management (18%).
  • Eight out of 10 appraisers with hedge fund clients say they’ve never been called in to assist their hedge fund clients with the development of a valuation policy.
  • When asked about standards (guidelines), 48% of respondents cite fair value accounting rules, 23% of respondents say they use no standards and 23% of survey-takers cite the Private Equity Industry Group Guidelines (PEIGG).
  • For those who choose not to pursue this area, appraiser liability was cited as the primary deterrent (77% of respondents), followed by 54% of survey-takers who say they are unfamiliar with the hedge fund industry.

Susan Mangiero will offer more analysis of the survey results in an upcoming issue of the Business Valuation Update™.

Website valuation metrics: big vs. small—and other complexities

Do the valuation metrics for large and small websites differ?  Internet veteran James Nicholson believes so.  Based on his research, James identified two value measures that differ for big and small websites: revenue multiples and cost per user. 

Excluding some outliers, James found that “larger, established websites generally have been valued at anywhere from 3X to 10X annual revenues,” while small websites have been valued at just 0.83X to 2X annual revenues.  For sites without much revenue, a better measure of value, he argues, is cost per user—which exhibits an even greater variance.  The study he conducted found that larger websites sell for a range of anywhere from $20 to over $200 per user, while most small websites sell for less than $1 per user. Read the Nicholson article here.

Sounds simple enough, but Mike Pellegrino of Pellegrino and Associates, disagrees.  “Mr. Nicholson's observations of website valuation tend to obfuscate the valuation issue.  They provide no guidance into the true value of a website.  A smart investor should never pay anything outside of a value range spanning the present value of a website to the seller on the low side, and the present value of a website to the buyer on the high side.  Further, the variance in his data is so large as to render the results moot." 

One needs only to look at recent history to see the perils of improper valuation of dot coms.  In an ever changing technical industry, the issue of website and dot com company valuation will only get more complex.  Pellegrino has researched this extensively, and states that he has “yet to find a peer-reviewed academic paper that proves any of the dot-com valuation methods worked, particularly across different product verticals (think books versus groceries).  The market valued Priceline.com using a revenue multiple at $10 billion, or almost as large as the entire airline industry, yet it lost $3 for every revenue dollar at the time and even had negative gross margins (i.e., it sold its tickets for less than it paid for them).  Free cash flow and its closest relative, earnings, are what matters.” 

For a much more detailed analysis of Pellegrino’s research in this area, see his paper titled “Valuing Early-Stage Technologies” by clicking here.

Pratt’s Stats® keeps up with Google…and other new functionality

Google’s new open source web browser, Chrome, was released last week.  BVR is proud to announce that we’ve updated the Excel export and batch print functions on Pratt’s Stats® so that our users can continue to have all the tools on Chrome (and Firefox) that they’ve had on Microsoft’s Internet Explorer.  

Another new improvement on BVMarketData.com is the ability to search the Pratt’s Stats® and Public Stats™ databases by a business name.  This new feature will allow the user to quickly see if the databases contain a particular sold business.

BVR strives to continually improve the functionality of all of our websites, so if you have any other suggestions for changes or improvements, please send them to bvwire@bvresources.com.

ASA and other appraisal organizations address IRS Proposed REG-1292423

On August 18th, 2008, on behalf of the American Society of Appraisers and three other organizations, Jay Fishman, FASA, testified at the IRS hearings on proposed regulations regarding tax return preparer penalties (Proposed REG-1292423-07).  Specifically, his testimony focused on the fact that, under the proposed rule, appraisers could potentially be considered non-signing tax return preparers, subject to penalties. 

Fishman’s defense of the profession was strident on two key points:  First, “[A]n appraiser could not know or reasonably expect to know whether the appraised value constitutes a ‘substantial portion’ of the tax return or claim for refund; and, would not, therefore, be [a] non-signing preparer."  Second, Fishman points out that “appraisers already have comprehensive competency, ethics and accountability requirements established by the Pension Protection Act of 2006 and other provisions of the Code…to categorize appraisers as ‘non-signing return preparers’ would result in the imposition on appraisers of a secondand we believe gratuitouslayer of requirements and sanctions that would not produce any additional public policy benefits.” 

The ASA, the Appraisal Institute, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers, who all signed on to a letter in support of the testimony, are asking that the IRS clarify this issue in the final version of the rule.  For more information on this issue, and for links to the full text of the testimony as well as the text of the jointly signed letter, click here.  

The first 45 days of IBA leadership under Howard Lewis…

On July 16, 2008, the IBA announced a plan to transfer its assets to a partnership including NACVA, ValuSource and KeyValueData. Howard Lewis, who spent 33 years with the IRS, including 8 years as the National Program Manager overseeing the Engineering and Valuation programs, took over as Executive Director from Michele Miles. Lewis made the following points in an interview with BVR.

Q. What misconceptions have you heard about this transaction?

Lewis: The number one misconception is that NACVA has acquired and taken over IBA. That is simply not true. There’s a fear that IBA will lose its independenceand that NACVA is now going to run the show and make all the decisions. As the new executive director, I have a very clear set of strategic goals and expectations. They all depend on the IBA maintaining its independence, culture and outstanding history.

Q. What are your goals for IBA?

Lewis: First, to develop, continue and improve on solid communications with IBA membership and its leaders. IBA’s leaders include regional governors that represent the IBA across the country. They have the closest contact with members and candidate members in their respective regions. My first goal is to develop and improve relationships and communications with those people. Number two is to take advantage of opportunities that are available with other organizations and stakeholders in our industry that would be beneficial to IBA and others as well [Editor’s note:  including BVR.  IBA and BVR are already working together on the IBA Guide to Sample Business Appraisal Reports, and the Summit on DLOM next week.] The third goal is to focus on IBA’s outstanding strengths, history and reputation. I’ve known Michelle and Ray Miles for quite a number of years and I’m looking forward to working with them to make sure that we maintain every element they built that made IBA the organization it is.

Free FAS 157 webcast

How should corporations apply FAS 157?  Hear the answer straight from the horses’ mouths…

FASB is offering a free FAS 157 webcast  on September 29th.  Panelists Leslie Seidman, Jim Kroeker, Don Charles, and Tony Sondhi  (Leslie Seidman is a member of the FASB, Jim Kroeker is Deputy Chief Accountant at the Securities and Exchange Commission, Don Charles is a Partner at Ernst & Young, and Tony Sondhi is the President of A.C. Sondhi & Associates, LLC) will discuss “common application and implementation activities on measuring assets and liabilities under Statement 157..”  FASB Technical Director Russ Golden moderates.

How low can you go?

What is the floor value for a cash negative business? Net asset value, because you can sell the assets and recoup your initial investment? “That is a valid argument only when you have no interest in making money,” says River’s Edge Alliance Group, LLC. “If you are in the business of making money you must severely discount the value of these assets for the fact that they are not income producing, are illiquid and come with an opportunity cost.”

If the purchased assets generate a return less than the buyer’s WACC, the assets will cost money rather than make it.  How about disposal costs, carrying costs and the time it takes to convert these assets to cash?  With risk, return, opportunity cost and asset marketability assessed together, one must consider what return is being offered to entice the purchase—if none, then the assets must be discounted.  “If not, what entices the purchase of these assets?  The opportunity to lose money each year?” Read the full article here, and send your comments to bvwire@bvresources.com.


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