Oracle of NY

Valuations and Pricing of Asset Backed Securities (ABS)

I will be attending ABS East in Miami, Oct. 25-27, to assess the potential of the asset backed securities (ABS) valuation and pricing market.

The demise of Bear Stearns and Lehman Brothers and the restructuring of other investment banks not only created a dislocation in the trading market for ABS but also a dislocation in the pricing and valuation of ABS for investors such hedge funds, banks and pension funds who had depended on those investment banks and market-makers for their monthly net asset value (NAV) pricing.

http://secure.imn.org/web_confe/index.cfm?sc=20091001_SF_0006

Hedge Fund Portfolio Valuations

We offer the best service at a reasonable price.
A veteran of investment bank Houlihan Lokey where I was a full-time Consultant in the Hedge Fund Portfolio Valuations group and of accounting firm Weiser LLP where I was Senior Manager Valuation and Corporate Finance, I have produced hundreds of business and investment valuations for transaction, tax and regulatory purposes.
I am now offering my hedge fund portfolio valuation services to you.
I specialize in the valuation of private investments in debt and equity but offer a full range of valuation services in conjunction with a nationwide network of valuation professionals.
Please let me know if you would like a free consultation to discuss valuations.

Joshua Persky
Tel: 917 650 8700

Valuation Services and Consulting

Steps for producing a valuation for a bank loan to a private company:

1. Gather and review financial and legal documentation.
2. Note key loan parameters such as: interest rate, maturity date, type of loan (bullet or amortizing), first or second lien, financial covenants, up-front and other fees, pre-payment penalty.
3. Note key financial performance parameters: EBITDA, income, margins, cash flow, balance sheet (historic, current and projected).
4. Analyze key financial ratios: leverage, interest coverage, loan to value.
5. Perform DCF analysis.
6. Compare company to similar publicly traded companies.
7. Compare loan to publicly traded similar debt instruments.
8. If the company is distressed, determine the value of its assets.
9. If the company is in bankruptcy, determine the probability and timing of recoveries.

For competitively priced hedge fund portfolio valuations, business development corporation and private equity valuation services and consulting, please contact:

Joshua Persky
tel: 917 650 8700
email: joshua.persky@sloan.mit.edu

Automated Anti-Hacking Vulnerability Assessment Report

I am in touch with an interesting startup company whose mission is to "create a disruptive approach in the global online vulnerability assessment and compliance markets, by our cutting-edge automated security testing for web applications and network systems."

They claim to challenge their competition by having significantly more automated security checks.

They are looking to work with hosting providers, information security resellers, integrators and government agencies.

They are looking for customers, business partners and funding.

If interested, please contact me at joshua.persky@sloan.mit.edu.

Discounted Gifting Opportunities

There is an immediate opportunity for people considering gifting closely-held operating companies and family limited partnerships:

“Current Global Economic and Credit Crisis”

• Can support lower value conclusions in front of the IRS



• Operating businesses, marketable securities, and real estate worth less based on current business climate (less demand, no credit to fund business operations and acquisitions)



• Get closely-held business and real estate appraisals done sooner rather than later to support reduced values



• Can support greater discounts for lack of control and lack of marketability for minority (non-controlling) interests
  
  – Credit crunch, difficult for consumers and businesses to get loans, pay bills
  
  – Lack of affordable consumer credit reduces consumer spending and, as a result, weakens our economy
  
  – Public marketplace is disruptive, reflected in reduced pricing (lower values) for some of America’s strongest companies
  
  – Significant job losses and unemployment at high levels
  
  – If public companies are severely impacted, what about closely-held businesses?

Factors to Consider when Valuing a Business (cont.)

• Review trading multiples for comparable publicly traded companies in similar businesses
  – Market evidence to support value conclusion



• Review sale transaction multiples for comparable companies (public or private) in similar businesses
  – Market evidence to support value conclusion



• Managements track record and its ability to achieve its objectives



• Key employees, business referral relationships, customer dependencies, access to capital to support and grow business



• Applicable discounts for lack of control and marketability

Factors to Consider when Valuing a Business

• The nature of the company’s business and its history (milestones, profitability, growth profile)
  
  
• The outlook for the economy, subject industry, and competitive landscape (impacts demand)
  
  
• The financial condition of the company (use of debt)
  
  
• Analyze the past and future earnings capacity of the company
  – Investing is forward looking, use history to help understand the future
  
  
• Prior transactions involving the company’s stock (indication of value)
  
  
• The ability of the company to distribute earnings (dividends)

Lack of Marketability Discount

The size of the discount applied to a specific interest is dependent on many factors:

• Dividend capacity
  - Has, can, will the investment/company pay dividends?



• Probable holding period
  - How long is the investment term, 3 to 5 years?
  - When can it be sold
  - Prospects for liquidity



• Degree of control in the block of stock
  - Control interest is more marketable than minority interest



• Restrictions on transferability (right of first refusal)



• Company’s stock redemption policy 

In short, how and when can I turn my investment into cash?

The Benefits of Control

• Appoint or change management, elect board members



• Determine compensation, bonuses, and perquisites



• Set operational and strategic policy



• Liquidate or recapitalize the company, sell-off assets



• Sell the business



• Register company’s debt or equity for an IPO

In short, you have more control of the investment, timing and cash flows.

Business Valuation Discounts

 Especially for closely-held businesses:

• Lack of control (minority interest)
  
  Why pay less for the ownership interest?
  - Inability to control the investment
  - Inability to control timing of cash flows
  - Less control, greater the discount



• Lack of marketability (no ready market for the shares)
  
  Why pay less for the ownership interest?
  - When or how long before I can convert my investment to cash?
  - Current economic benefit? 
     Annual dividends 
     Some exit or sale event in site? 
     Longer the holding period, greater the discount

Size of discount depends on:

• Method used to arrive at value
• Level of control and marketability of the subject interest

Valuation Approaches and Methods (cont.)

Asset approach:

• Most appropriate for:
  - Asset holding companies, Family Limited Partnerships’s (FLP's)
  - Real estate entities
  - Marginally profitable businesses
  - Purchase accounting
  
  
• Business is worth more dead than alive
  
  
• Method does not address the future earnings capability of the company
  
  
• Balance sheet approach: as of a certain point in time
   
• Adjust assets and liabilities to fair market value from historical cost
  
  
• Net Asset Value = Assets - Liabilities = "Equity"

Valuation Approaches and Methods (cont.)

Market approach:

• Analyze trading multiples for publicly-traded companies deemed comparable
  - Similar product/service offerings
  - Customer profiles
  - Revenue size
  - Geography
  - Capital structure
  
  
• Review and compare sale transaction multiples for target companies that are deemed comparable
  
  
• Consider past transactions in subject’s stock
  
  
• Consider bona fide offers for the company’s shares
  
  
• Apply guideline company or transaction multiples (adjusted for risk) to subject’s cash flows or earnings

Valuation Approaches and Methods

Income approach: 

• Most appropriate for businesses anticipating future earnings
  
  
• Capitalization of cash flows method
  - Stable state model, growth at rate of inflation, management does not have much visibility as to company’s future, projections are not reasonable or available
  - Earnings or cash flow divided by a capitalization rate
  
  
• DCF method (discounted cash flow) 
  – Considers future cash flows associated with owning investment
  – Most theoretically correct method (total return = dividends + capital gain event)
  – Dependent on projections, economic and industry factors
  – Consider free cash flows during projection period (three to five years) plus terminal or exit value
  – Present value cash flows with a discount (return) rate reflecting risks inherent in business and capital structure
  
  
• Historical results analyzed and adjusted to help estimate future cash flow
  
  
• Investors buy tomorrow’s cash flow
  
  
• Apply cap rate, discount rate or multiple to cash flows or earnings

Premise of Value

Define an appropriate premise of value: does the business have a future or should it be liquidated?

• Going concern value
  
  - Business has future operations
  
  - Cash flow generating
  
  - Forward-looking



• Liquidation value (sell off assets and wind down business)
  
  - Orderly (time to maximize)
  
  - Forced (auction)
  
  What approaches and value premise will allow you to extract the most value from the subject business?

 

Standard of Value

Determine the appropriate standard of value for your valuation analysis: the type of buyer or seller, purpose, and what is motivating them.

• Fair market value
  
  - Willing buyer, willing seller, both informed, not forced to transact
  
  - Same management competence and access to capital
  
  - Financial buyer, not a strategic buyer (no synergistic benefits assumed – no revenue enhancements and/or cost reductions)
  
  - Spelled out in detail in Revenue Ruling 59-60 (guiding light)
  
  Appropriate for:
  
  - Estate, gift & income tax
  
  - Often in buy-sell agreements
  
  - Divorce (but depends on state statute)