Deloitte Valuation
Conference
Valuation for AIFMs
February 2015
© 2015 Deloitte Tax & Consulting
Conference Agenda
© 2015 Deloitte Tax & Consulting
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Valuation for AIFMs
AIFs’ Investment Valuations Encounter Several Risks to be Addressed
Assets to Be Valued
Unquoted &
illiquid
Context
Subjectivity / professional judgment
Consequences
Objective
Insufficient
control framework
Valuation by fund
manager
Conflicts of interest
Risk of bias in valuations of AIFs’ underlying investments
Risks
Mitigation
Complex & hard
to value
Valuation Process and Governance
Accounting standards & valuation guidelines
Regulatory framework (AIFMD)
Production of sound, unbiased and transparent valuations performed with due care and skill
© 2015 Deloitte Tax & Consulting
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Valuation for AIFMs
Subjectivity Case Study 1 – Discounted Cash Flows Method
Initial Enterprise Value derived from Discounted Cash Flows Approach
Company
EV/EBITDA
10x
Peers
EV/EBITDA
7x
100
Enterprise value
from Management
© 2015 Deloitte Tax & Consulting
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Valuation for AIFMs
Subjectivity Case Study 1 – Discounted Cash Flows Method
Revision of Cash Flows for EBITDA Margin
70%
65%
EBITDA margin (%)
60%
FORECASTS
(unobservable inputs)
55%
50%
45%
40%
35%
30%
25%
20%
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
FY2015
FY2016
FY2017
Management’s EBITDA margin
Upper and lower bound of peers’ EBITDA margin
© 2015 Deloitte Tax & Consulting
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Valuation for AIFMs
Subjectivity Case Study 1 – Discounted Cash Flows Method
Impact on Enterprise Value from Revision of EBITDA Margin
Company
EV/EBITDA
10x
8.5x
Peers
EV/EBITDA
7x
7x
15
100
85
Enterprise value
from Management
© 2015 Deloitte Tax & Consulting
Impact of EBITDA Adjusted enterprise
margin revision
value
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Valuation for AIFMs
Subjectivity Case Study 1 – Discounted Cash Flows Method
Revision of Discount Rate (WACC) to Adjust for Country Risk Premium
Geographic Origin of Cash Flows
Country Risk Premium
Credit
Downgrade of
Ukraine
20%
32%
15%
10%
68%
Spread: 6.9%
5%
0%
FY2011
FY2012
FY2013
17.1%
FY2014
Europe
German government bond 10 year yield
Ukraine
Ukraine government bond 10 year yield
© 2015 Deloitte Tax & Consulting
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Valuation for AIFMs
Subjectivity Case Study 1 – Discounted Cash Flows Method
Impact on Enterprise Value from Revision of Discount Rate
Company
EV/EBITDA
10x
8.5x
6.5x
Peers
EV/EBITDA
7x
7x
7x
15
20
100
85
65
Enterprise value
from Management
© 2015 Deloitte Tax & Consulting
Impact of EBITDA
margin revision
Adjusted enterprise
value
Impact of WACC
revision
Adjusted enterprise
value
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Valuation for AIFMs
Subjectivity Case Study 2 – Earnings Multiples Method
Initial Equity Value based on Peers Trading Multiples
Management
P/E
multiples
18x
(50)
180
130
Equity value from Management
© 2015 Deloitte Tax & Consulting
Impact of earnings growth
adjustment
Adjusted equity value
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Valuation for AIFMs
Subjectivity Case Study 2 – Earnings Multiples Method
Revision of P/E Multiple for Expected Earnings Growth
28x
26x
P/E Multiple
24x
Peers average:
Growth: 10%
P/E multiple: 18x
22x
20x
Company:
Growth: 6%
P/E multiple: 13x
18x
16x
14x
12x
10x
4%
6%
8%
10%
12%
14%
Expected Earnings Growth
© 2015 Deloitte Tax & Consulting
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Valuation for AIFMs
Subjectivity Case Study 2 – Earnings Multiples Method
Impact on Equity Value from P/E Multiple Adjustment for Earnings Growth
P/E
multiples
Management
Multiple adjusted for
earnings growth
18x
13x
(50)
180
130
Equity value from Management
© 2015 Deloitte Tax & Consulting
Impact of earnings growth
adjustment
Adjusted equity value
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Valuation for AIFMs
What you see is not always what it seems
© 2015 Deloitte Tax & Consulting
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Valuation for AIFMs
AIFMD Framework to Achieve Independent and Sound Valuation Process
AIFM valuation function
Delegation
No delegation
External Valuer
Pros
Cons





Third party expertise
Unlimited recourse against
external valuer (negligence)
Fees
Availability?
AIFM still responsible
© 2015 Deloitte Tax & Consulting
Internal Valuation
with third party assistance
Internal Valuation
 Hands-on approach
 Reduced external costs
 External expertise & flexibility
 Lower cost
 Segregation of duties




Capability?
Capacity?
Segregation of duties
Supervision of advisor
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Valuation for AIFMs
Illustration of Risks Embedded in Valuation Process and Governance
Risks
Stakeholders
AIFM role
AIFM
• Conflicts of interest
Fund
CoInvest
Fund
Holdco
Structuring
SPV
Propco
• Process oversight
• Consistency
• External valuer vs.
internal function
• Timing, etc.
• Depositary bank
• Escalation measures
• Legal
• Tax
• Accounting agent
• Accounting
• Due diligences
• Financing, etc.
• Property-specific
Underlying
© 2015 Deloitte Tax & Consulting
• Real-estate appraiser
• Review valuation
• Structure monitoring
• Quality of information
• Completeness of data
• Independence
• Market
o Inspection
• Competence
• Regulatory, etc.
o Market data
• Scope & limitations
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Valuation for AIFMs
How to Achieve Unbiased Valuations
1
2
3
© 2015 Deloitte Tax & Consulting
Fairness
Maximize use of observable inputs
Governance
Unbiased
Identify and mitigate risks
valuation
results
Transparency
Increase disclosures
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Valuation for AIFMs
Panelists
Alexandre Dumont
Chief Executive Officer, BIL Manage Invest
Simon Powell
Director of Compliance and Risk Management, Advent International
Antonio Thomas
Partner, ManagementPlus
Jérôme Wittamer
Head of Investment Management, Genii Capital
© 2015 Deloitte Tax & Consulting
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Thank you for listening
If you have any questions or comments, please contact [email protected]
Key contacts
Strategy & Corporate Finance
Pierre Masset
Partner – Corporate Finance Leader
+ 352 451 452 756
[email protected]
Strategy & Corporate Finance
Joachim Heukmes
Director – Corporate Finance
+ 352 451 452 037
[email protected]
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