BVR Logo 6 April 2021 | Issue 25-1

BVWire—UK is a free service from BVR focusing on the business valuation profession in the United Kingdom. We offer news and perspectives from valuation thought leaders, the High Courts, HMRC, the standard-setters, ICAEW, RICS, IVSC, and more.

Please be in touch with your perspectives, news, and ideas—and pass this issue along to colleagues (complimentary sign-up instructions are here).

COVID-19 hasn't hurt any of the large UK providers of business valuation financial data

UK business valuers don’t have to worry that their large financial data sources will disappear any time soon. Refinitiv, now part of the London Stock Exchange Group, and S&P Global have reported strong increases in sales. Late last week, FactSet announced results for its second quarter ended 28 February. Revenue increased 6.0%, or $22.0 million, to $391.8 million, compared with $369.8 million for the same period in fiscal 2020. Customer and user lists increased, suggesting continued activity for both their “buy” and “sell” side customers.

Operating costs, employee costs, and capital expenditures all decreased compared to last year, mirroring a trend in the financial information industry.

The future looks bright, too, since FactSet reported that its deferred revenue (the company refers to paid subscription revenue that hasn’t been earned yet as “annual subscription value,” or ASV) from the EMEA region was $427.6 million, compared with the prior year period of $407.9 million. Organic ASV increased 3.7%, to $426.8 million. EMEA revenues were $105.5 million, compared with $102.1 million from the second quarter of fiscal 2020. Excluding the effects of acquisitions and dispositions completed in the last 12 months and foreign currency impacts, the organic revenue growth rate for the EMEA region was 1.5%.

“I am proud of how we executed this quarter, resulting in a solid first half of our fiscal 2021,” said Phil Snow, FactSet’s CEO. “In our second quarter we saw a number of key wins validating our strategy for long term growth. Our focus on digital transformation, content expansion, and being an open platform continues to resonate with our clients as they navigate a rapidly evolving landscape.”

Other financial data providers continue to offer new expensive products. For instance, LSEG made a big splash with a new infrastructure investment platform release via Refinitiv recently. “Infrastructure 360” offers “an enhanced suite of index, market data and analytics tools to support global infrastructure investors” as an upsell to the Refinitiv Workspace. The new dataset tracks primarily bond financing for over 2,500 projects around the world—with a plurality focused on sustainability.

UK-developed program for ‘ESG’ investment training goes global via CFA Institute

Most BVWire—UK readers we’ve spoken with feel the industry “buzz” around scoring listed companies according to their environmental, social, and governance (ESG) factors is of minimum significance to the business valuation profession, since market and income approaches already account for the risks of bad behaviour within a private-market sector or specific target company. “It’s in the future cash flows and cost of capital,” one Big Four valuation expert said.

Nonetheless, ESG is a trend in the investing world that will increasingly be questioned in business valuation, so all UK analysts should at least be familiar with the concepts. One source is now the CFAI, which announced a new training and ESG investing certificate program in late March. The program, developed by CFA Society of the UK, offers “a new global qualification for ESG in investment management.”

Becoming certified is not for the faint of heart. The certificate is a self-study course requiring approximately 130 hours of study, culminating in a two-hour-and-20-minute computer-based exam, and it costs about £5,000. (Given the fact that CFA Institute’s own survey indicated that only 69% of their retail investor members were interested in ESG, it remains to be seen whether this investing concept has staying power.)

Will HMRC enforce its new tools in post-
COVID-19 insolvencies?

Since 1 December 2020, HMRC has regained its status as a preferential creditor. Valuation experts working with distressed businesses and insolvencies will need to assess HMRC’s reinstated role carefully, since no one is entirely clear yet on how Treasury intend to respond once winding-up restrictions end or whether delayed tax payment agreements are enforced. These decisions could influence whether distressed entities survive.

Most legal and tax experts are uncertain at this point. Squire Patton Boggs (SPB) published a thorough analysis of the issues of concern and unknown risks last week in London, which concludes, “[I]f HMRC don’t respond in a supportive manner, 2021 could be a bumper year for both tax recoveries and insolvencies.” The law firm notes that an aggressive HMRC stance now would “undermine the support given by the Government to businesses to date” and would certainly destabilise many insolvency processes as crown debt gets paid ahead of less secured debt. HMRC petitions would also, likely, increase.

SPB also note another “relatively new tool in the HMRC arsenal” of joint and several liability of directors (see their alert on this topic, which could increase risk for distressed businesses). To date, “HMRC have yet to come out all guns blazing,” the law firm notes.

Freyman article on CAPM in renewable
energy available

A new analysis by a trio of Grant Thornton experts (Tomas Freyman, Jade Palmer, and Axel Rescanieres) addresses income approach valuation issues in renewable energy—a topic made more important because Europe’s investments in this area increased 52% last year, while the rest of the world, including the US, China, and India, dialed back.

The article, “Does CAPM Work for Valuing Renewable Energy Assets,” (available for download here) highlights some of the differences in the risk/return characteristics of this asset class. Long-term incentive schemes such as feed-in tariffs are one example, but renewable projects also have less leverage than other infrastructure investments, particularly in the UK, the authors note.

These factors alter most of the elements of CAPM analyses. For example, the data set for betas “is still limited and is coupled with no sufficiently strong index to compare.” Similarly, the authors point out that these projects have little input price or product price variation, so standard corporate ERP numbers may also provide inconsistent valuations.

Dates for your diary

20 May: ICAEW Virtual Valuation Conference,
9:00-16:00, virtual

20 May: ASA First Complex Securities Conference, 16:00-22:40 BT, virtual

14-15 June: ICAEW Advanced Valuation Techniques, virtual classroom taught live by Steve Shaw

21-25 June: NACVA Business Valuation & Financial Litigation Hybrid & Virtual Super Conference

24-26 October: ASA International Conference,
Las Vegas

27-29 October: IVSC Annual General Meeting (programme and format information in development)

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