Thanks to the Wills, Trusts & Estates Prof Blog for alerting us to William H. Frazier’s (Howard Frazier Barker Elliott) recent article “Valuation Discounts in Tiered Investments” (Trusts & Estates, Oct. 2010). In his article, Frazier asserts:

It’s important to realize that the discount isn’t an entity, a commodity or a “thing” in its own right, but merely a mathematical comparison of two separate concepts of value. The discount isn’t “selected,” but “determined” by a process that considers risk and reward in the context of alternative investments available in the marketplace.

If this is so, then the discount doesn’t exist because of a legal structure or design but because of the operation of economic forces that can be objectively demonstrated within a particular business construct. It’s not the complexity of the construct that gives rise to valuation differences but the existence of identifiable and measurable risk factors.

Last year Frazier and John Porter (Baker Botts LLP) were featured in BVR’s Valuing Tiered Partnership Structures webinar. Click here for the training pack.