Carla Nunes and James Harrington of Kroll provided 15 September 2022 UK economic growth estimates at last month’s ICAEW Annual Business Valuation Conference.

Kroll’s current estimate for the UK is 3.4%. Not surprisingly, they are projecting a flat 2023. Their current estimate for UK economic growth in 2023 is 0.2%.

Growth estimates have been less reliable since COVID-19, from Kroll and all other sources, from the IMF on down. This has also been true in the Blue Chip Economic Forecast data that BVR’s economic data rely on. (The UK MSCI for 2022 is -10.8%, and, since April 2022, it’s up 33%. No wonder growth estimates are less reliable.)

In addition, the risk-free rate is changing after a long period of stability. Ten-year yields in the UK are more volatile than in any period other than the 2008 downturn. The risk-free rate (RfR) in the UK was close to 1% at the beginning of the year and peaked at 3.2% last week. (The U.S. RfR is now at 3.5%.) Inflation has stayed stable (now at 9.9% in the UK, according to Kroll) but still at a 40-year high.

As evidence, Harrington mentioned that the consensus of economists projected 2022 economic growth for the eurozone at 4.3%. As of 15 September, this projection had dropped to 2.6%, and many now suggest that the final number will be revised down further.

The expected long-term growth rate should reflect “organic” growth only, so the effect of the acquisitions should be backed out, suggests recent research by Roger Grabowski (Kroll) and Ashok Abbott (West Virginia University). Grabowski conducted an interesting session at the recent ASA 2022 International Conference in Tampa, Fla., and he believes that common approach includes both existing firms and new firms, whose growth is driven by acquisition. Firms such as Amazon and Apple are driving GDP growth—so you can’t assume your subject company will grow at the rate of GDP, he says. Therefore, Grabowski cites research that estimates real long-term growth in aggregate corporate earnings at 3%, with 2% (or two-thirds) attributable to new companies. Therefore, the long-term average real earnings for existing businesses (i.e., organic growth) will, on average, grow at the rate of one-third of real GDP plus inflation.

The Draft Accounting and Valuation Guide, Business Combinations is now available. This guide provides guidance and illustrations for valuation specialists regarding the accounting and valuation considerations for business combination transactions. UK business valuers may wish to review the guide and are welcome to provide comments at this time.

Interpath Advisory, formed two years ago as a management buyout from KPMG, has appointed David Mitchell as managing director in itsvaluations practice. Mitchell was previously head of the UK Valuations team at BDO. He will work with fellow managing director, Steve Taylor.

Interpath’s Head of Advisory Mark Raddan observed that “David’s arrival comes at a pivotal moment in time, with the gathering economic headwinds prompting more and more organisations to seek a clear and robust understanding of the value of their businesses and assets.”

Mitchell brings experience in both contentious and noncontentious matters and lists specific expertise in the specialised area of tax and restructuring valuations.

Last month, EY partners voted to separate their audit practice from advisory (including business valuation), following through on a strategy announced in May. The new, separate consulting arm will begin with revenues of $24 billion and take on a new name. Partners will own around 75% of the business, with the remaining stake to be floated on the share market.

An example is the UK government’s procurement policy, which includes a 10% weighting for “social value.” This policy means that potentially better quality or lower-priced products from foreign sellers could be overlooked, increasing expenses. If an analyst were to adjust risk factors further based on a positive “ESG” rating or judgement, the (theoretical) value of the government would be overstated. The same problem holds true for valuations of closely held enterprises.

The clearest practice aid currently available for business valuers is the IVSC’s “ESG and Business Valuation” (available here). This offers a cautious step toward systematic use of ESG data into business valuation practice and standards.

A new academic study examines the reliability of the various ratings schemes for environmental, social, and governance (ESG) factors in both business valuation and investment contexts. Authors David F. Larcker (Stanford University), Lukasz Pomorski (AQR Capital Management), Brian Tayan (Stanford University), and Edward M. Watts (Yale School of Management) “find that while ESG ratings providers may convey important insights into the nonfinancial impact of companies, significant shortcomings exist in their objectives, methodologies, and incentives which detract from the informativeness of their assessments.” The new study, “ESG Ratings: A Compass Without Direction,” is available here

At BVR’s National Divorce Conference last week, several valuation experts quantified the impact of multiple judgements that have the consistent effect of either reducing or increasing the value of a subject company. If all of an expert’s judgements tilt the value in the same direction, “the judges in family law cases are likely to express concern,” said Ron Seigneur.

He listed examples of compounded judgements that can combine to provide the appearance of bias, including:

• Director’s compensation;

• Capitalization of cash flows;

• Discounted rates;

• Company-specific risk;

• Market data multiples; and

• Discounts for marketability or liquidity.

In MDW Holdings Limited v James Robert Norvill (& Ors) [2022] EWCA Civ 883, the UK Court of Appeal recognised that a claimant who would not have made a purchase but for the deceit will be entitled to (at least) the difference between the price paid for the property and its actual value. And, if consequential losses were suffered, additional compensation will likely be due.

The decision concerned the acquisition of a private company and focused on the timing of when damages should be assessed in a breach of warranty claim. It will offer guidance to business valuers concerned about the court’s approach to assessing commercial and shareholder damages for deceit.

The court describes different damages standards if the claimant who would have proceeded with the purchase (albeit at a lower price) despite knowing the truth. In those cases, damages are measured by reference to the difference between the price paid and the price that the purchaser would have paid had it known the truth.

The European Association of Certified Valuators and Analysts (EACVA) and the IVSC have launched the new European Business Valuation Magazine (EBVM) for valuation practitioners. You may download the first addition and subscribe to future quarterly additions for free.

EBVM is intended to be a European platform to discuss practice issues in business valuation. Until now, discussions have mainly taken place nationally within the individual professional groups of valuation professionals. The EBVM aims to increase the transparency of valuation practice in European countries and to enable professional exchange on an international level.

Issue one includes articles on: “Valuation Ambiguities Under the European Directive on Preventive Restructuring Frameworks”; business models; “Use Cases and Analytical Approaches for Valuation of the Asset ‘Data’”; and “Unlocking the Value of ESG.”

If you would like to submit an article for the magazine, you can email the editors to find out more.

19 October: Society of Shares & Business Valuers How to Lose at the Tax Tribunal With David Bowes, London and virtual, 17:30-19:00 BST

2-3 November: ICAEW Advanced Valuation Techniques, virtual classroom

10 November: Prevailing in an Unpredictable Market: The 15th Annual Houlihan Lokey Alternative Asset Valuation Symposium, New York City

1 December: ICAEW Practical Business Valuation, four days, virtual classroom

7 December: Society of Shares & Business Valuers’ Causation and Financial Losses: Factors to Consider With Prem Lobo, London and virtual, 17:30-19:00 BST

Want to share a news item? Have feedback or comments? Please contact David Foster at ukeditor@bvresources.com.

Want to share a news item? Have feedback or comments? Please contact
David Foster at ukeditor@bvresources.com.