Private equity: MBAs with checkbooks ‘run amok’

BVWireIssue #63-1
BVWireIssue #63-1
December 5, 2007

“When I come back next year, the topic will be the private cost of capital model and how you will no longer need public cost of capital models,” Rob Slee announced at his AICPA session on transfer pricing for private companies.  As first reported in the BVWire, Slee is still working with academics and analysts to survey “every stop for capital in private markets,” from banks to business owners.  “We’re in the middle of something better,” he promised.

In the meantime, Slee—an investment banker and private business owner— considers valuation to be perhaps more important than even appraisers do.  “It’s the language of the private capital markets.”  If an owner ever says, “I’ve never thought about it [the value of my company],” then that person is lying.  “I think about it once a minute,” Slee admitted.  Owners aren’t idiots so much as ignorant; their companies have an infinite range of value depending on the transfer method.  An ESOP will turn on fair market value, for example, while an MBO (management buyout) will invoke investment value.  In his practice, Slee takes private company owners through a transfer “spectrum” to demonstrate pricing dependency on the owner’s selection of a particular method.  But if they covet a private equity buyout, their optimism may border on idiocy.  “What are PE groups?  MBAs with checkbooks run amok,” he said.  After picking the “low-hanging fruit” from the U.S. economy, PE funds are now turning to international markets such as China and India, with over $1 trillion in their “checking” accounts. 

“My mission is to keep this American adventure alive,“ Slee said, by helping business owners make value-added decisions, including their use of professional appraisers as transfer pricing consultants.  “We can engineer solutions and create transparency for owners to see through the ‘constellation’ of values,” and possibly get a cut of the deal, too.  For more on his financial engineering for the middle market, including his IBA article on Private Business Appraisal as Viewed Through Value Worlds, visit Slee’s website.

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