What you should know from the spring BV conferences

BVWireIssue #224-4
May 26, 2021

valuation profession news
cost of capital, conference, industry analysis, financial instruments

BVWire has been on the virtual road attending some excellent events. Last week, we brought you some coverage of the ASA Energy Valuation Conference from Houston. This week, we share some interesting takeaways from three events we attended.

The New York State Society of CPAs (NYSSCPA) Business Valuation and Litigation Services Conference had two timely sessions on cryptocurrency. Valuations are tricky, but finding them in the first place can be even trickier. Locating crypto assets is a long, slow, and complex process. There’s no IRS reporting if you just buy and hold it, so it won’t show up on Forms 1040 or 8949. Reporting is triggered if you sell or trade in it—and just spending it to buy something constitutes a “sale” that is reportable. Of course, some of this goes unreported and some transactions are done under the table. One of the speakers was a Certified Cryptocurrency Forensic Investigator (of which there are very few) who pointed out that not all Bitcoin transactions are recorded—some are done on the dark web, a “very dangerous” place where conventional tracing tools do not work, he said. Other topics at the conference included more emerging issues (SPACs, Zoom as a practice-builder) and some new twists on evergreen topics (estate valuations, cannabis, distressed firms, and collaborations).

Later in the week, it was the first-ever ASA Complex Securities Virtual Conference, where new research on volatility was presented that revealed that the market is not capturing the full extent of volatility. Convertible debt with high volatility is being overvalued—and so are those with lower market volatility (but not as much). An entertaining session compared the valuation of complex securities to valuing NFL contracts. Player contracts often include options, but teams are not required to value them. What are they worth and how do they affect risk? Should a player enter into a contract with a guaranteed minimum and team options? The principles developed in valuing options on common stocks can help answer these questions. Monte Carlo simulation can be used just as analysts use it to value complex financial options. Other speakers discussed SPACs and contingent consideration, and there was a lively ask-the-experts session.

Then it was on to the United Kingdom for the Institute of Chartered Accountants in England and Wales (ICAEW) Valuation Conference. Professor Pablo Fernandez (IESE Business School, Universidad de Navarra), who has written extensively on valuation and common sense and is well-known for his opinions on the capital asset pricing model (CAPM), did the lead-off session While CAPM received a Nobel Prize and is used in nearly every business valuation textbook, “CAPM can be an absurd model, lacking any relationship to human understanding,” he told the audience. His position is that CAPM and its betas do not explain anything about expected or required returns. Professor Ian Cooper (London Business School) did a separate session on the adjustments many analysts apply (for small size, distressed assets, country risk, or other factors). These adjustments can compound business valuation “anomalies.” With today’s historically low interest rates, premiums have a disproportionate impact and can “drive your entire valuation. Your adjustments matter a lot at the moment,” he said. He showed that a 12% micro-cap size premium reduces value by about 76% for small firms. “Certainly, the evidence for this kind of adjustment is less clear now than it was in the past,” making the application of size premia more complicated. Other sessions included more on the impact of company size, cost of capital for family firms, an economic update, and a town hall-style panel session.

Of course, these events contained a great deal more useful information. More detailed recaps of these conferences will be in the July issue of Business Valuation Update.

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