Issues in Hedge Fund Valuations The proliferation of hedge funds presents an opportunity for valuation analysts. In this article, the author provides an overview of the hedge fund industry, compares the manner in which hedge funds operate vis-à-vis private equity and venture capital, and outlines the opportunities and challenges for valuation analysts interested in serving this market sector.
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Exits of private equity firms from investments fell 67 percent by volume and 81 percent by dollar value.
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An Overly High Valuation Can Scare Away Investors or Spark a Down Round that Dilutes an Earlier Angel Investment Mark Boslet at PE Hub explains that with IPOs on track to have their biggest year since 2010 and some major technology disruptions sparking infectious excitement, it’s important to keep in mind key fundamentals including not accepting too high a valuation for your business or investment properties. Here’s why:
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Why VCs and Private Equity Pros are Sensitive to IRC 409A Valuations Rand Curtiss weighs in on why IRC 409A option-related valuations for small businesses do not solve real business problems for them. They set minimum exercise prices, asserts Curtiss—but that’s all they do.
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Earnout Variables Often Account for 15 to 25 percent of Purchase Price in many Middle Market Acquisitions. Here are Tips for Structuring Them Carefully Earnouts typically appear in a large number of middle-market deals, usually accounting for 15 to 25 percent of the total purchase price. While an earnout can to be an elegant solution to “close the gap” between seller and buyer, the fact is earnouts are complicated and subject to a number of limitations. Ron Stacey explains some issues surrounding earnouts, including their appeal, shortcomings, possible structures, appropriate metrics, duration, tax treatment, and value.
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Past Performance is No Longer a Viable Valuation Tactic: Learn to Anticipate Future Prospects with Data Mining, Proprietary Benchmark Techniques, and a Close Look at Both Cash Flow and Capital Expenditures. Caleb Slabbert, writing at VentureCapital.org, which bills itself as a non-profit organization that has been “a premier resource for both entrepreneurs seeking funding and for investors who want to help promising young companies achieve their potential,” asserted this week (3/26/13) that past performance of a company is no longer a viable valuation tactic. What matters? Newer techniques that many firms aren’t taking advantage of:
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Stakeholders Discuss Greater Institutional Investor Makeup, Governance Structures, Greater Regulatory Scrutiny Deloitte Insights contributes a piece to the CFO Journal on the Wall Street Journal site, part of a series designed to provide financial executives a customized resource to help them address the strategic, operational and regulatory issues they face in managing their finance organizations and careers, with top-line digests, research, perspectives and technical analyses. This Deloitte Insight reports on the Third Annual Hedge Fund Symposium Series held in New York recently. There, Joseph Fisher, who leads the Hedge Fund Audit practice for Deloitte & Touche LLP in New York, commented on how…
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MidasFund Will Not Acquire Distressed Companies; However, it Will Buy Stable Divisions of Bankrupt Companies. Here’s Why. “Last week’s announcement that MidasFund had started acquiring zombie companies caused a flurry of emails,” writes Rob Slee on the MidasMoments blog of the MidasNation site. “Many of you asked about the differences between acquiring distressed, zombie and healthy companies. Let’s dig into this.” Here’s an excerpt:
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With Limited Resources, the SEC is Using a “Risk Analytics” Strategy to Target Areas of Concern, Explains Exec at Conference Recent examinations of newly SEC-registered private equity firms is helping regulators understand the complex world of private equity, according to delegates and speakers at PEI’s CFOs and COOs Forum 2013 in New York, writes Nicholas Donato at Private Equity Manager. More:
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The “Market” is Not Always Right When it Comes to Value, Especially in M&A Transactions The mergers and acquisitions market began a slow recovery this last year after a sharp downturn in 2009. Was the slowdown caused by banks reducing lending activity, cash hoarding by businesses, economic uncertainty, or the simple failure of buyers and seller to agree upon price? Michael Blake takes a look at how value is variously defined—“fair market value,” “fair value,” “investment value,” and “market value”—and offers an assessment of what may prove to be the primary market M&A activity drivers going forward.
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Plus: A Black Box that Performs Business Valuations for Privately Held Companies? The Scenario Might Not Be as Far-Fetched as You Think Not too long ago I had lunch w/a senior valuation guy, someone who’s made his living in the field for some 30 years, and was there almost from the first days The National Association of Certified Valuators and Analysts (NACVA) was formed and Shannon Pratt began publishing his first books. His thesis? On the horizon are electrical cars that drive themselves; computers that calculate things in miliseconds that third graders used to be taught to manually construct…
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There’s Lots We Know about Private Capital. There are Things We Don’t Know, too—and Need to Be Aware of. Robert T. Slee explains in this excerpt several key macro insights—and related themes—that his recent book Private Capital Markets is based on. The macro insights are that corporate finance theory doesn’t predict behavior in private capital markets, and valuation, capitalization, and transfer are not discrete and unrelated areas. Themes include insights on the differences between public and private markets, compliance, relative value, and more.
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Good Values are Sometimes Overlooked. How Can Private Equity Investors Best Assess Company Viability? With nearly $1 trillion in dry powder, the private equity market is becoming steadily more competitive. EBITDA multiples are rising, PE firms are holding their portfolio companies longer, and pension funds are starting to make direct investments. So how do smart investors in private equity compete? Axial Markets talks to John McNamara, founder of LongueVue Capital, to find out how LongueVue find companies that are good values but often overlooked. LongueVue specializes in “opportunistic, situation-driven, value” by regularly looking at companies that don’t have perfect financials but…
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Successful Exit Key to Current Performance—and Future Sponsorship Opportunities Chris Manderson at PE Hub writes that in the private equity world today, sponsors’ track records in successfully exiting investments are a major factor in fundraising. If sponsors cannot exit previous investments and provide returns, they will find it much more difficult to raise subsequent funds:
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Of an Estimated $72B Raised by U.S. Buyout Sponsors Through Mid-Year, 43% Has Gone to Mega-Funds PE Hub opines that while many LPs claim they favor small- to mid-sized business investments, that this year the numbers are beginning to tell a different story. There is increased investment in buyout funds doing deals of $1 billion or more in size. It may be that mega-funds while less are simply the only place public pensions and other big institutions can deploy the large slugs of the capital needed to keep their GP stables a manageable size:
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It’s Prime Time for Estate Planning Market volatility may be tough on the nerves, opines the Wall Street Journal, but it could be a boon for wealthy families looking to shelter assets from taxes while helping their children. Here’s how to devise strategies on discounts, GRATs, and loans. Additional advice: take advantage of low interest rates and exploit the federal gift-tax exemption.
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Bankers Say M&A ‘Good for Good Companies’ Which Can Often be Sold for 9-10x Earnings Luisa Beltran at PE Hub wonders: “Is there an M&A slowdown?”
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Competitive Intelligence is Key to Smart Acquisitions Part of growth is acquisition. To do smart acquisitions, you need insight into a business owner’s thoughts—specifically, her concerns vis-à-vis selling the businesses. These are not questions with simple yes or no answers; it’s more critical to figure out what an owner thought was missing in previous acquisition overtures. What, aside from price, will it take an owner to sit down and discuss a sale? The McLean Groups’s Zane Markowitz offers a case study and blow-by-blow analysis.
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From attempting to recast the public image of private equity to trying to forge a new investment firm, 10 individuals profiled in the June issue of Mergers & Acquisitions are making their marks on middle-market investing, Tamika Cody, Mary Kathleen Flynn and Danielle Fugazy report. From the intro: To highlight a few: Pam Hendrickson, chief operating officer of the Riverside Co. and a director of the global Association for Corporate Growth, has been spreading the word on Capitol Hill, and across the country, that private capital matters to the growth of the U.S. economy. Andrew Sheiner, a managing director…
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Private Equity Manager reports that with regulators looking over their shoulders, some GPs are playing it safe by hiring third-party valuation advisors to check their numbers. However not all third-party opinions are equal, warns Cindy Ma, managing director at advisory-focused investment bank Houlihan Lokey. PE Manager’s Nicholas Donato talked with her recently. Here are excerpts: There was a feeling of unease in the industry when the US Securities & Exchange Commission (SEC) announced an informal inquiry into private equity portfolio valuations. Many wonder, how do I stay off regulators’ radar screen? The SEC has developed a number of analytical tools that now…