Alternative Investment
Pricing
Siobhan Durcan
Asad Lukwago
25 October 2012
© 2012 Deloitte LLP. Private and confidential.
Agenda
1. Real Estate Pricing
-
2. Private Equity Pricing -
2
Siobhan Durcan
Asad Lukwago
© 2012 Drivers Jonas Deloitte. All rights reserved.
Real Estate Pricing
3
© 2012 Drivers Jonas Deloitte. All rights reserved.
Real Estate Valuation
Understanding the Science;
Appreciating the Art !
© 2012 Deloitte LLP. Private and confidential.
The Science
© 2012 Deloitte LLP. Private and confidential.
The Valuer’s Toolkit
Gone are the days….
© 2012 Deloitte LLP. Private and confidential.
The Valuer’s Toolkit
More scientific and more analytical…….but still ‘market informed’.
© 2012 Deloitte LLP. Private and confidential.
Demystifying the ‘yield’
Yield describes the amount returned to an
investor through income generation as a
proportion of his or her investment.
Return describes the amount returned to an
investor through either income generation
and/or capital value change as a proportion of
his or her investment.
Years Purchase (“YP”) is the fundamental valuation concept
that provides the link between Yield and Value.
Yield
Expressed as a
percentage
Year Purchase (YP)
Inverted yield figure to
provide multiplier
Value
Result of multiplying YP with
income (rent).
© 2012 Deloitte LLP. Private and confidential.
Yields, Yields and more Yields…
Initial
Reversionary
Running
Equivalent
• Relationship between value and current contracted income.
• Can hide / mask upcoming income variations.
• Also known as the “All Risks Yield”
• Relationship between value and the anticipated income upon reversion – either
Market Rent, fixed increase or another “Estimated Rental Value”.
• Care required – what assumptions have been made in establishing what the
reversionary income will be ?
• The ‘Snapshot’ yield.
• Relationship between value and the anticipated income at a given point in time.
• “The Valuers’ Choice” !
• Relationship between value and ‘time weighted’ average income.
• Two forms – Nominal (income annually in arrears) is most common. ‘True’
(income quarterly in advance)
Equivalnt
© 2012 Deloitte LLP. Private and confidential.
The Method Matrix
The ‘Five’ Valuation Methods
Common
Name
Comparable
Investment
Residual
Profits
DRC
Also known
as
Comparative
Capitalisation
Development
Accounts
Contractors
Adopted in
situations where
an element of
‘development’
value exists.
Due to the
significant
number of
different input
variables used a
sensitivity
analysis is
imperative to
accompany the
reported value.
Generally
adopted when
property value
underpinned by
the trading
potential eg.
Pubs & leisure,
hotel, petrol
station, airport,
self storage, car
park
Simplistic
Description/ approach, often
Comment
used in tandem
with one of the
other methods.
The most
common
approach
adopted for
‘conventional’
investment
property.
Two Forms….
Traditional
• Term & Rev.
• Hardcore
Modern
• DCF
For properties
that are rarely
traded and for
financial
statements: art
galleries,
schools …
© 2012 Deloitte LLP. Private and confidential.
Investment Valuation Methods: Critique
Traditional Methods
Modern Methods
(Term & Reversion and Hardcore)
(Discounted Cashflow)


• Simple
• Particularly easy to deploy when there is
plentiful comparable evidence
• Differentiation / Layering of risk is
‘intuitive’

• Lack flexibility when dealing with
increasingly wide variety of asset types
and income profiles.
• Use of ‘All Risks Yield’ is relatively ‘blunt’
•
•
•
•
Transparent
‘Easy’ to build for complex scenarios
Straightforward sensitivity analysis
Overcomes risk of ‘double-counting’
income

• Heavily reliant on quality of input data
• Explicit nature of inputs unlikely to ‘mirror’
investment drivers of all investors –
therefore inherently a method more akin to
an assessment of ‘worth’.
© 2012 Deloitte LLP. Private and confidential.
The Art
12
Deloitte
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Interpreting the Numbers
“A cynic is someone who
knows the price of
everything but the value
of nothing.”
Oscar Wilde
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The Official Line
RICS Red Book
“Valuations are opinions and judgments on the price which could
be achieved in a transaction subject to certain assumptions or
special assumptions and interpretation of the market.”
Interpretation of:
• Comparable Evidence
• Legal tenure and tenancy arrangements
• Advice set out in specialist reports – eg. Building Surveys
Judgement on:
• Market’s perception of Tenant Covenants
• Liquidity & Market appetite / ability to act
© 2012 Deloitte LLP. Private and confidential.
The Interpretations – Comparables
YIELDS
Location Proximity
Date
‘Arm’s Length’
Specification
‘Comparability’
Covenant
Condition
Scale
Tenure
© 2012 Deloitte LLP. Private and confidential.
The Interpretations – Specialist Reports
• What are the important messages in the reports ?
• How would ‘the market’ react ?
•
•
•
•
•
•
•
•
•
•
•
Building Surveys
Environmental Reports
Ground Condition Reports
Reports and Certificates on Title
Town Planning Reviews
Rights of Light Issues
Tenant Covenant Reports
Current and Impending legislation
Sector specific intelligence
Energy Performance Certificates
Sustainability Reports
© 2012 Deloitte LLP. Private and confidential.
The Art….Conclusions
The computer helps….
……………..but experience and insight are essential !
© 2012 Deloitte LLP. Private and confidential.
Market Monitor
18
Deloitte
© 2012 Deloitte LLP. Private and confidential.
UK Net Investment by Type of Buyer (£m)
Source: Property Data
© 2012 Deloitte LLP. Private and confidential.
Deloitte prime yield monitor
Changing sentiment since 2009
Sector
Shops
Shopping Centre
Category
Jun-12
Cathedral Cities
0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00
Market Town
0.00 -1.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00
Prime Regional
0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00
-1.00 0.00 -1.00 -1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00
Parks (open A1)
0.00 0.00 1.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00
Parks (bulky)
0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00
Car Showrooms Manufacturers
Dealerships
Leisure Parks
Industrial
Jun-11
0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00
Solus
Supermarkets
Jun-10
Prime Major Cities
Prime town centre
Retail
Warehouse
Jun-09
-1.00 -1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00
0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00
-1.00 -1.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00
-1.00 -1.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Standalone superstore
0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distribution (15 year term)
0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distribution (Inside M25)
Modern Ind. Est. (outside M25)
0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00 1.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00
Modern Ind. Est. (inside M25)
0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Older terrace / estate
Offices
-1.00 -1.00 -1.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00 -1.00
City
0.00 0.00 1.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00 0.00 0.00 0.00
West End
0.00 0.00 1.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 1.00 0.00 0.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Edge of Core
0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00
Western Corridor
0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Major Cities
0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00 -1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Business Parks
-1.00 -1.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.00 -1.00 -1.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00
© 2012 Deloitte LLP. Private and confidential.
The Rationale & Recent Experiences
On 1st April 2011 the RICS set up Valuer Registration, due to pressure from external regulators and a
perception that some valuers are “sailing too close to the wind”.
Dangers
 Recent questionable assumptions/practices resulting in inaccurate valuations:
1. Validity of Transactions – related-party transactions, e.g. JV partners entered into, in order to support
values;
2. Data validation – insufficient validation of data adopted into valuations;
3. Tenants’ assumed ability to pay rent – weak covenant understanding by valuers in difficult markets;
4. Hope value – optimistic levels included with little justification; and
5. Developer’s profit – no profit allowance on unfinished developments - understating risk to completion.
Added Value
 Audit quality enhanced through use of specialists within the firm:
1. Providing ‘comfort’ in uncertain times;
2. Active in the market – can challenge valuers on key valuation assumptions with ‘first hand’
experience;
3. Risk reduction – property assets are often a very substantial part of the balance sheet;
4. Enhanced objectivity – In-house valuers – used to delivering external valuations – are able to provide
an objective view; and
5. Jargon busted – Valuers terminology understood.
© 2012 Deloitte LLP. Private and confidential.
Our Service Offer
Transaction Support
Valuation Purposes
Property Strategy & Negotiation
Corporate
Valuation
Investment
Real Estate
Public
Sector
Loan Advisory
Accounts Valuations & Assurance
Portfolio Administration
Tax
Interest Restructuring Advice
‘Best Value’ Charity Advice
Litigation Support
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© 2012 Deloitte LLP. Private and confidential.
Valuation Assurance – Existing audit support clients

Traditionally, ‘Real Estate’ focused

Increasing focus on ‘FSI’ and ‘Consumer Business’
© 2012 Deloitte LLP. Private and confidential.
Contacts
Philip Parnell
Greg Branch
Tel: 020 7303 389
Email: pparnell@djdeloitte.co.uk
Tel: 01534 824325
Email: gbranch@deloitte.co.uk
Andrew Isham
Siobhan Durcan
Tel: 01534 824297
Email: aisham@deloitte.co.uk
Tel: 01534 824274
Email: sdurcan@deloitte.co.uk
© 2012 Deloitte LLP. Private and confidential.
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Private Equity
Update & investment valuation
Asad Lukwago
© 2012 Deloitte LLP. Private and confidential.
Structure
Market update
Investment valuation
27
© 2012 Deloitte LLP. Private and confidential.
Market update
Key industry drivers
Current market conditions
Authorities
Level of market activity
• New and upcoming regulations;
• Tax authorities challenging tax
structures;
• Low exit and new deal activity;
• Challenging fundraising times.
‒ PC deal structures – leverage;
‒ Tax on management fee waivers;
‒ Taxation of carried interest.
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© 2012 Deloitte LLP. Private and confidential.
Market update (Cont..)
Private equity fundraising
Source: Preqin Research Report Q3 2012
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© 2012 Deloitte LLP. Private and confidential.
Market update
Private equity fundraising (Cont..)
Increased investor demand
‒ cut on management fees
‒ management fee offsets (increased pressure on 100% offset for all fee income)
‒ limits to amount of capital that can be invested in any given year
‒ bringing down the voting threshold from 75% to 50% to affect changes to a Fund
(“Doomsday” Scenarios)
‒ most are demanding a preferred return huddle
‒ squeeze on carried interest
‒ limitations with respect to selling stakes in GP to third parties
‒ increased scrutiny of partnership expenses
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© 2012 Deloitte LLP. Private and confidential.
Market update
Private equity fundraising (Cont..)
Responses for GPs include:
‒ Economic incentives for early closings (sweeteners/fee breaks)
‒ Management fee discounts
‒ Choice of higher management fee for 100% offset against fee income
‒ Increasing GP’s commitment to at least 2% and up to 5% (as opposed to 1%)
‒ Wider scope of target investors (South America, Middle East, China)
‒ “Anchor” or “Strategic” LPs, demanding/offered preferential terms
‒ Debt funds
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© 2012 Deloitte LLP. Private and confidential.
Determination of fair value
32
Presentation title
© 2012 Deloitte LLP. Private and confidential.
Valuation Guidelines vs Accounting Standards
IPEV Guidelines issued September 2009 (New layout August 2010).
Issued to provide framework to enable managers to present the fair value
of an investment consistent with the underlying GAAP
IFRS 13 sets out a framework for measuring fair value in a single IFRS
Similarities
• Definition of fair value
• Valuation techniques
‒ Market approach (Both)
•
•
‒ Cost approach (IFRS 13 only)
‒ Income approach (Both)
• Both don’t preclude the use of mid-market
pricing or other conventions used by market
participants within a bid-ask spread for listed
instruments;
•
•
•
Differences
IPEV Guidelines cover more valuation
techniques for asset instruments;
IFRS 13 more elaborate on the valuation
techniques it covers
IFRS 13 also covers valuation of liabilities and
entity’s own equity instruments;
IFRS 13 permits (but doesn’t require) use of bid
prices to value quoted asset positions and ask
prices for liability positions;
IPEV Guidelines allow discounting quoted
prices in certain circumstances.
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© 2012 Deloitte LLP. Private and confidential.
Fair value definition and key principles
Liability
Asset
The price that would be
received to sell the
asset
Fair value is an
EXIT PRICE
For non-financial assets
In an orderly
transaction
• The highest & best use
of the asset
• Whether the asset is
used in combination with
other assets or standalone
34
Between market
participants
At measurement
date
Price that would be
paid to transfer the
liability
• NOT how much paid to
settle liability
• Based on how much the
reporting entity has to
pay to a willing market
participant
© 2012 Deloitte LLP. Private and confidential.
Determination of Fair Value
•
•
Fair value is a market-based measurement, not an
entity-specific measurement:
-
Use market assumptions, under current market conditions
(including risk); and
-
Entity’s intention to hold an asset or to settle or otherwise
fulfil a liability is not relevant
Assumes business is realised at the reporting date,
appropriately allocated to the various interests,
regardless of whether the business is prepared for
sale or whether there is any intention to sell in the
near future
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© 2012 Deloitte LLP. Private and confidential.
Enterprise value
In PE, value is generally crystallised through a sale of the entire underlying
business. The value of the business as a whole at the reporting date
(Enterprise Value (“EV”)) will often provide a key insight into the value of
investment stakes in that business.
Fair value is estimated from the EV as follows;
1. Determine EV using the valuation methodologies
2. Adjust EV for surplus assets or excess liabilities
3. Deduct instruments ranking ahead of the highest ranking instrument of
the Fund
4. Apportion the Attributable EV between the company’s relevant
financial instruments according to their ranking
5. Allocate the amounts derived according to the Fund’s holding in each
instrument, representing Fair Value
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© 2012 Deloitte LLP. Private and confidential.
Valuation Methodology
Unquoted Investments
1. Price of recent investment
•
How measured in due diligence work prior to purchase?
•
Third party transactions
•
Reference to a transaction that is substantially the same
•
Milestone analysis
2. Earnings Multiple
•
•
•
EBITDA, EBIT or Revenue
Normalised LTM
Choice of multiples
‒
Comparables (basket of quoted companies Vs recent observable transaction)
‒
Correlation with the earnings used
‒
Historic, current or forecast
‒
Discount (differences in comparable companies, liquidity, control)
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© 2012 Deloitte LLP. Private and confidential.
Valuation Methodology
Unquoted Investments (cont..)
3. Net Assets
4. Discounted cash flows or earnings
•
•
of underlying business
from the investment
5. Industry valuation benchmarks
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© 2012 Deloitte LLP. Private and confidential.
Valuation Methodology (cont…)
Valuation Guidelines for Fund-of-Funds
Reported Net Asset Value
Adjustment to the reported NAV
• No accrual for potential performance fees or carried interest;
• Significant elapsed time between the reporting date of the investee fund and the
Fund-of-Funds reporting date;
• Information from a secondary transaction providing it is sufficient and
transparent;
• Particular clauses in the Fund agreement that affect distributions which are not
reflected in apportioned NAV; and
• Differences in valuations by fund manager GPs for common companies with
identical security holdings.
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© 2012 Deloitte LLP. Private and confidential.
Valuation Methodology (cont…)
Quoted Investments
• Should be valued at bid prices
• Use of representative point estimate in a
bid/offer spread (Mid Market price)
• Discount reflecting the time value of
money and the additional risk from
reduced liquidity
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depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of
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