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Deloitte Valuation Conference Valuation for AIFMs February 2015 © 2015 Deloitte Tax & Consulting Conference Agenda © 2015 Deloitte Tax & Consulting 2 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 3 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 4 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 5 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 6 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 7 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 8 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 9 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 10 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 11 Valuation for AIFMs What you see is not always what it seems © 2015 Deloitte Tax & Consulting 12 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 13 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 14 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 15 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 16 Thank you for listening If you have any questions or comments, please contact valuation@deloitte.lu Key contacts Strategy & Corporate Finance Pierre Masset Partner – Corporate Finance Leader + 352 451 452 756 pmasset@deloitte.lu Strategy & Corporate Finance Joachim Heukmes Director – Corporate Finance + 352 451 452 037 jheukmes@deloitte.lu • Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. 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