Business valuers concerned about fintech can get a great view of this critical sector from ‘UK FinTech: On the Cutting Edge,’ a just-released study HM Treasury commissioned back in 2014 as part of the Chancellor of the Exchequer’s goal of making the UK the ‘global capital of FinTech.’ Imran Gulamhuseinwala, EY’s fintech leader, led the study, whose prime purpose was to compare the local ecosystem with those in California, New York, Hong Kong, Singapore, Germany, and Australia.

The report begins by positioning the UK as the dominant player in this sector, looking at 2015 data:

We estimate that the UK FinTech sector represented c.£6.6b in revenue in 2015 and attracted c.£524m in investment. With c.61,000 people employed in the sector (c.5% of the total financial services (FS) workforce), more people work in UK FinTech than in New York FinTech, or in the combined FinTech workforce of Singapore, Hong Kong and Australia.

Over half (54%) of UK fintech firms are in the banking and payment subsector, followed by credit and lending (20%), and investment management and capital markets (12%). Insurance, pension, and retail fintech make up most of the balance.

That being said, capital and valuation questions pose some challenges. The EY study finds that the government policy and human capital positions are stronger than the other international fintech ecosystems. And there are many effective financing schemes for startup fintech. Still, investment support for middle-market and listed fintech companies in the UK falls far short of the kind of capital available in California or New York, and meanwhile China is entering the market with major investments. This tends to drive successful UK fintech firms toward the NYSE or Nasdaq, though the LSEG’s ‘profile has continued to rise within the financial services sector with notable listing over the past two years.’ Much of this success has resulted from the 2014 Project Innovate programme.

Pablo Fernandez, the professor of finance at IESE Business School, remains one of the most thoughtful observers of business valuation practices. His latest paper, published late last week, addresses ‘the most common error in valuations using WACC.’

As usual, his short analysis provides not only humour, but also reason for concern. He compares two valuations from the same investment bank using income approach methods—the first prepared based on the present value of expected free cash flows and the second based on the present value of expected equity cash flows.

The result? Sadly, two different values: €6.9 million using the first method, and €4.2 million using the second.

The new RICS Valuation—Global Standards (generally known as the ‘Red Book’) come into effect on 31 January and replace the edition issued in 2017. There are relatively few changes from the 2017 edition, and nearly all of those apply to real property only.

RICS anticipates larger changes in the accompanying ‘Basis for Conclusions.’ Here’s a clear summary of the situation from Valuology.

Valuology partner Chris Thorne particularly highlights a revolutionary change in this new edition of the Red Book, caused by the introduction of IVS’ ‘should’ phrasing. This will ultimately influence real property and business valuation professionals:

RICS has never before attempted to direct how its members should value a given type of property in given circumstances, having previously recognised that this is both impractical and contrary to the ethos that it is the valuer’s professional responsibility to choose the appropriate method or methods to adopt. However, this direction is now embedded in the Red Book via the back door of the IVS.

In theory, clarification and stabilisation make markets happy, so the current road map to exit should encourage investors. Most also feel that the UK’s regulatory regimes, programmes, and taxation policies will support listed company values—and that the SMEs will follow. Other commentators hope for a lift during 2020 as the government spends more, particularly in the north and Midlands, where some Labour voters turned Conservative rather than vote for Jeremy Corbyn (the rail network and the NHS look to be prime beneficiaries, along with a new energy and climate change department, of the extra spending when the new budget is presented next month).

What does it all mean for small-business valuations? First, analysts who increased their UK cost of capital conclusions because of Brexit risk (the FT and others have dubbed this the ‘Corbyn discount’) will need extra research to continue. Other factors that will impact business valuations completed for SME clients:

• Many business valuers are lowering their long-term tax rate assumptions for SMEs;

• The ‘new normal’ (lower long-term growth and higher risk premia) that BVR (and most others) considered three years ago (here’s one example) cannot be assumed;

• Interest rates’ risk for small businesses has not developed, as many feared, so the cost of debt remains lower than forecasts as recently as November 2019; and

• The share prices of companies in the sectors most at risk of nationalisation under a Labour government have been the ones to recover most resoundingly, so appraisers using listed company comparables need to review their financial ratio assumptions with great caution.

As one UK investor told BVWire—UK, ‘the UK is no longer “uninvestable”’. For business valuers, this means higher conclusions of value for many small and medium-sized enterprises as well.

In 2010, the Federation of Evaluation Experts (FFEE) was established in law as a French not-for-profit with the mandate to offer input and harmonise standards for business valuation. FFEE is a member of IVSC, which just published an interview with FFEE Director Amaury Catrice. Twelve different valuation organisations, representing ‘the vast majority of valuation professionals working in France,’ comprise the FFEE federation:

• A3E (Association des Experts en Évaluation d’Entreprises);

• AFREXIM (Association française des sociétés d’expertise immobilière);

• APEI (Association professionnelle des experts indépendants);

• APVIF (Association Professionnelle des Valorisateurs d’Instruments Financiers);

• CCEF (Compagnie des Conseils et Experts Financiers);

• CEIF FNAIM (Chambre des Experts Immobiliers de France FNAIM);

• CNCC (Compagnie Nationale des Commissaires aux Comptes);

• CNECJ (Compagnie Nationale des Experts Comptables de Justice);

• CNEJFD (Compagnie Nationale des Experts Judiciaires en Finance et Diagnostic);

• CSOEC (Conseil Supérieur de l’Ordre des Experts Comptables);

• IFEI (Institut français de l’expertise immobilière); and

• RICS (Royal Institution of Chartered Surveyors) France.

Epsilon Research has released the Q3 2019 Argos Index, which measures private midmarket company valuations in the euro zone. The Index is calculated based on the information contained in the Epsilon multiple analysis tool (EMAT), a unique database of European acquisition multiples and deal analysis reports (€1m-to-€500m deal value). Using a rolling six-month historic view, Epsilon Research finds a current enterprise value/EBITDA (EV/EBITDA) ratio of 10.1x—similar to the ratio from the two previous quarters. The EMAT transaction multiples database is available here with subscription.

Similarly, this year’s UK 200 Small and Medium Enterprise Valuation Index shows little change in overall multiples. UK 200 notes particularly that capital remains plentiful (and relatively cheap) for smaller enterprises, and, with sterling under pressure, the UK has suddenly become ‘a good value option for M&A activity.’ Their EV/EBITDA multiple has risen to 6.1x, from 6.0x last year. These ratios were derived from a group of transactions with a £5.0 million average deal size—so very representative of the type of business valuations many BVWire—UK subscribers do.

Advanced Valuation Techniques, 17 February, 11 June, 16 September, London

HMRC Shares and Assets Valuation Fiscal Forum, 25 February, London

ICAEW Practical Business Valuation, 16-17 March, London; 14 and 26 May, London; 9 and 29 July, London; 9 and 19 November, London

ICAEW Business Acquisition & Due Diligence, 22 April, 24 September, 25 November, London

73rd CFA Institute Annual Conference, 17-20 May, Atlanta

EACVA 14th Business Valuation Conference, Andrew Strickland, and Nick Talbot for their valuable contributions to BVWire—UK

Our thanks to Marianne Tissier, Andrew Strickland, and Nick Talbot for their valuable contributions to BVWire—UK.

Want to share a news item? Have feedback or comments? Please contact
David Foster (executive editor) at ukeditor@bvresources.com or +011-917-741-3853.