The IVSC, in collaboration with RICS, released a new video looking at the impact of COVID-19 on global markets, geopolitics, and the global economy on 20 April. While much of the panel examines real property, IVSC’s chair, and former UK Chancellor of the Exchequer, Alistair Darling, offers an historical perspective to help business valuers.

‘This is different from 2008,’ Darling begins. The ‘complete fracture of the banking and financial system resulted in a situation where the then-biggest bank in the world, RBS, was within hours of running out of money.’

Still, this problem was ‘fixable,’ and leaders agreed on what needed to be done, whether from the Republican-led US or from the leader of the Communist Party of China. Now, 10 years later, risk has been somewhat controlled because banks are required to be better capitalised.

Today, governments are quite rightly ‘shutting down the economy in order to minimize contact,’ so we’re not at a recovery stage yet and ‘we are not yet in control of events’ or at a stage of declaring premature victory,’ Darling says. ‘Inevitably there is going to be scarring of the economy whether or not the anticipated global recession occurs.’

‘How do you value business assets when you don’t know where the end of the crisis may be,’ Darling asks. ‘Longer-term, some fundamentals will continue, but the global impact on transportation, or office space, or other areas, will be felt for years, even if governments, institutions, and individuals work across international borders to achieve a plan for recovery.’

Andrew Tilton, chief economist (Asia) at Goldman Sachs; Susanne Eickermann-Riepe, real estate leader at PwC Germany; and Simon Rubinsohn, chief economist at RICS, join Darling on the video.

The cost approach is normally accorded a lower status for going concerns, but Andrew Strickland advises valuers to think twice given the current crisis. ‘This Cinderella of business valuation approaches is likely to make it to the ball when we start to count the economic cost of the present crisis,’ he says in this month’s issue of Business Valuation Update. ‘There may be many situations in which reduced profits mean that business valuers must remember to cross-check values to those the cost approach gives.’

Strickland gives particular notice to ‘the flightiest and most flimsy assets’; using the cost approach with intangibles and how these fit within the IVS 2020 definition; and application of the cost approach summary method.

A special edition (fifth) of the “European Capital Market Study” from ValueTrust was released last week. The study, written by Professor Dr. Christian Aders, Florian Starck, Benedikt Marx, and Marion Swoboda-Brachvogel, provides business valuers with another source of trading multiples and total shareholder returns across a wide range of industries. It also includes a comprehensive compilation of capital market parameters such as cost of capital and implied as well as historical risk premiums for European countries.

ValueTrust finds that the risk-free rate has dropped to 0.11% as of 31 March. In addition, the ‘implied market return (ex-ante) for the European market increased from 7.8% as of December 31, 2019 to 9.1% as of March 31, 2020, mainly caused by a severe decline in market capitalizations in March 2020.’ Of critical importance to business valuers, ‘the market risk premium rose from 7.6% to 9.0%, mainly due to the increase of the implied market return.’

ValueTrust usually releases this study on a semiannual basis, but, ‘given the current COVID-19 crisis and the associated declines in market capitalization and revision of analyst forecasts, we release an additional study as of March 31, 2020 in order to give decision-makers guidelines with regard to current valuation parameters,’ the authors say.

Some investment fund sponsors are now holding damaged assets in many of their late-state funds. Lacking an open market, these sponsors may turn to ‘affiliate transactions’ as their sole alternative to ‘highly dilutive financing transactions or asset sales at depressed valuations,’ says Houlihan Lokey in last week’s client newsletter.

BVWire—UK has spoken to several private equity fund managers with funds that they need to close down who are left holding acquisitions made in 2014 to 2016 in particular that are now potentially worthless. While most sponsors aren’t facing as dire situations, it’s common in the private capital markets that late-stage funds are now deferring portfolio company sales, and the result is liquidity and performance problems.

HL says they’re seeing many funds turn inward to solve these challenges, with so-called affiliate transactions such as:

• Portfolio company support financings. Sponsors may invest new capital into a portfolio company to enhance liquidity and avoid potential defaults. Capital may be invested from a vehicle different than the one holding the portfolio company, and such capital can be in the form of debt, preferred stock, or common equity. Each of these alternatives can impact the economics of co-investors or other shareholders.

• Portfolio company mergers. Sponsors may combine portfolio companies in the same or adjacent businesses—often held in different funds—to rationalize costs and strengthen the enterprise. Also, a vehicle that is currently in the investment phase may fund an acquisition of a (potentially distressed) target by an existing portfolio company.

• Late-stage fund solutions. As exits via M&A or GP-led secondary transactions are postponed, sponsors must still deal with funds that are at or near end of life. To avoid requesting an extension and possibly provide investor liquidity, sponsors may choose to either “cross trade” an asset or portfolio to a later vintage fund or structure continuation vehicles to lengthen hold times and allow for operational and valuation recoveries to occur.

Affiliate transactions, of course, raise the likelihood that valuations and independence will be questioned. HL emphasises this point by concluding:

[A] fairness or valuation opinion assists the GP in satisfying its legal, regulatory, and contractual duties in connection with such transactions and may serve to protect the sponsor from challenge and facilitate discussions about the transaction with the LP advisory committee and co-investors … an independent valuation of the asset(s) subject to a transaction or the evaluation of a security in connection with a related party investment is particularly important to ensure the analysis is up to date and reflects current market conditions.

The 2020 edition of FactSet Mergerstat Review was released last week by BVR and offers comprehensive annual rosters, data, and statistics on M&A transactions, including privately held, listed, and cross-border deals. And, as always, the Review is the most reliable source for control premia by year as well as industry multiples.

Data for each annual edition are sourced from FactSet under exclusive agreement with BVR. Two features from previous years have been restored in the new 2020 edition. First, back by popular demand, the 2020 Review once again includes the Industry Analysis chapter that was originally featured in all editions up to 2017. Plus, the original Transaction Roster is also back, based on Mergerstat Industries that appeared in the 2018 and preceding editions.

The 2020 Review also includes the definitive ‘Top 20 UK Deals’ ranking roster with complete ratio and financial analysis.

Other highlights of the 2020 Review include:

• Your purchase also includes the Mergerstat Monthly Review, a monthly update on M&A activities, trends, and deal data by industry;

• Annual update captures 20 years of historical M&A data and reflects the most up-to-date snapshot of the FactSet Mergers & Acquisitions database;

• Top 100 global deals summary;

• Four new tables of Top 20 deals of 2019 in Canada, Latin America, Asia, and the EU;

• Details on premiums paid over the targets’ enterprise values; and

• Details on private equity transactions and activity, including unit divestitures, management buyouts, and certain asset sales.

The International Private Equity & Venture Capital Valuation Guidelines Board has issued special guidance for applying the IPEV Valuation Guidelines when estimating fair value at 31 March 2020. IPEV states that, while the alternative asset industry is robust, the COVID-19 crisis ‘has impacted more people, more businesses, more rapidly than any crisis in recent history.’

The special guidance addresses equity and debt investments as well as limited partnership interests and includes a specific caution regarding business valuations that ‘double dip.’

Care should be taken not to ‘double dip’ with respect to valuation inputs—if performance metrics have been adjusted to consider lower expected performance, an appropriate multiple should be applied rather than a multiple derived from comparable public companies whose results have not yet included lower expected performance. The same concept applies when using the income approach. If future cash flows have been adjusted, the increase in the discount rate may be less than the increase in the discount rate if cash flows have not been adjusted for the impact of the crisis.

Hampleton Partners’ IT and business services M&A market report depicts an accelerating tech market that’s continued into Q2—with a somewhat surprising list of most active players.

Hampleton’s analyses suggest that Accenture was far and away the top acquirer in IT during the last 30 months, with 53 total deals, followed by Dentsu Aegis Network. Interestingly, the third most active acquirer, with 16 IT-industry deals, was Deloitte. The firm purchased regional tech firms in areas such as data, HR consultancy, cloud computing, and cannabis. A complete list of Deloitte’s tech acquisitions is available at consultancy.org.

BVR’s Excel for Valuation E-Learning Course offers:

• More than 100 downloadable examples including unsolved exercise worksheets with ‘solved’ counterparts so business valuers can check their work;

• Case studies that walk through DCF calculations in Excel;

• Step-by-step instructions on building balance sheets, multiple sheet formulas and models, and how to deploy macros for maximum efficiency;

• Advanced tips and tricks from the experts on shortcuts, navigation tools, and more; and

• The ability to start at ‘cell one’ or jump to the functions that will impact your analyses the most.

One example of a relatively little-known Excel function that can make changes to forecasts vastly quicker is EOMONTH. Dates are very important to forecasts business valuers use and should not just be hard-coded into a spreadsheet since the values often need to be changed. This is where the EOMONTH function in Excel can be essential. We tend to work with month end dates, and this is where this function becomes invaluable.

EOMONTH calculates the end of the month as the number of months after the specified date. For example:

• EOMONTH(3-Apr-20,2) = 30-Jun-20; or

• EOMONTH(28-Nov-19,-12) = 28-Nov-18.

Most analysts use the DATE function to guarantee that Excel understands the cell as a date rather than a value.

BVR’s Excel for Valuation is available on-demand for £397.

IVSC Annual General Meeting, 14-16 October, Chicago

EACVA 14th Annual Business Valuation Conference, 29-30 October, Munich

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

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David Foster at ukeditor@bvresources.com.