Corporate Venture Capital Trends

With the rapid rise of corporate venture capital and increasing pressure to jump on board with startups, it seems that many companies across the industry spectrum are making venture investments.

GM Trades at 5.6x Earnings for a Reason; Subprime Lenders Can Too

David Einhorn of Greenlight Capital Inc. is no stranger to controversy. His current project is General Motors Corp. He put a flashlight on its common shares on March 28 arguing that they are unreasonably cheap. Immediately before the proposal was made GM’s shares were trading just below $35 per share, which equates to 5.8x 2016 earnings of $6.00 per share and 5.6x the midpoint of management’s 2017 guidance ($6.25 per share). The dividend yield is high at 4.4%, more than double the yield of the S&P 500. As Einhorn points out, the yield is not high because the payout ratio is high; the $1.52 per share dividend equates to just one quarter of (current) earnings.

Reading the Tea Leaves at Ruth’s Chris Steak House in Lafayette

l was struck by how the Ruth’s Chris Steak House in Lafayette, La. was packed on a mid-March Tuesday night. When I ate there a year ago, I was one of a half-dozen people in the restaurant. Perhaps it is just a coincidence, but the price of oil nearly doubled over that period. The regional economy may not be that responsive to moves in the price of crude, but people’s reaction of being tight-fisted vs. loosening-up can change quickly based upon perceptions.

Portfolio Valuation and Regulatory Scrutiny

Over the past decade, we have been retained by several investment funds to assist them in responding to formal and informal SEC investigations regarding fair value measurement of portfolio investments. Reflecting back on those engagements yields a couple observations and reminders for funds and fund managers as they go through the quarterly valuation process.

Market Participant Perspectives

We have published a collection of these posts in a book entitled “Market Participant Perspectives: Selections from Mercer Capital’s Financial Reporting Blog.” For our existing clients and blog subscribers, we hope that the book uncovers a post or two of interest that you might have missed the first time around. For clients that we haven’t met yet, there’s probably no better introduction to our team than the collection of posts in this book.

Income Post-Mortem and Coupon Clipping

“So why be constructive on private credit when one of the tenets of the central banks’ zero and negative interest rate policies is to push investors to take more risk? Maybe it is misplaced, but I think there is more value (all else equal) in high current income than waiting on a terminal value when asset values are inflated.”

A Layperson’s Guide to the OPM: Everything You Always Wanted to Know About the OPM, But Were Afraid to Ask (Part 1)

The option pricing model, or OPM, is one of the shiniest new tools in the valuation specialist’s toolkit. While specialists have grown accustomed to working with the tool and have faith in the results of its use, many non-specialists remain wary, as the model – and its typical presentation – has all the trappings of a proverbial black box. The purpose of this post is to clarify the fundamental insight underlying the model and illustrate its application so that non-specialist users of valuation reports can gain greater comfort with the model. In Part 2, we will provide address some qualitative concerns regarding use of the method in practice.

Marking Illiquid Investments in Liquid Funds

As mutual fund flows continue to favor passive strategies, some active fund managers are beginning to look to alternative asset classes to augment returns and generate sustainable alpha. Since open-end funds need to calculate NAV on a daily basis, the inclusion of illiquid venture capital investments in liquid funds shines a brighter spotlight on fair value measurement.

Preferences and FinTech Valuations

Despite a strong year in the FinTech sector, IPO pricing is always tricky, especially in the tech space. In this post, we consider Square’s IPO and how preferences associated with shares affect valuations.

Time Will Tell: Diverging Perspectives on BDC Portfolio Values

We observed last spring that 2015 would likely mark a turning point in portfolio valuations with the degree of difficulty likely to increase during the year. With Q4 earnings season beginning, we take an opportunity to check in on portfolio marks and market sentiment over the year. The key takeaway from the year is that the valuation perspectives of investors and portfolio managers began to diverge.

Are You GIPS-Compliant?

The Global Investment Performance Standards (GIPS®) were adopted by the CFA Institute in 1999 and are widely accepted among the international investment management industry. GIPS are a set of ethical principles based on a standardized, industry-wide approach that apply to investment management firms and are intended to serve prospective and existing clients of investment firms. While compliance by investment firms is voluntary, many investors consider GIPS compliance to be a requirement for doing business with an investment manager. Alternative managers have lagged behind the industry in claiming compliance with GIPS, but changes in the industry suggest GIPS compliance is becomingly increasingly important.

Updated: Valuation Best Practices for Venture Capital and Private Equity Funds

The International Private Equity and Venture Capital Valuation (IPEV) Guidelines were developed in 2005 to set out recommendations on best practices in the valuation of private equity investments. The IPEV Board is made up of leading industry associations from around the world, including the National Venture Capital Association (NVCA) and the Private Equity Growth Capital Council (PEGCC) in the United States. In October 2015, the IPEV Board published draft amendments to the existing guidelines that, if approved, will go into effect at the beginning of 2016.

Valuation concerns mark Southern Capital Forum: Are VC trends the canary in the RIA coal mine?

Mercer Capital had a great time sponsoring the Southern Capital Forum on Lake Oconee last week. The annual gathering of the venture community is a favorite to check in with many of our clients and get a read on capital markets from some intentional listening. Beautiful weather and the bucolic surroundings of Reynolds Plantation helped, and on the second day of the conference, Janet Yellen kept her foot on the cost of capital. So what’s not to like? Despite the generally upbeat attitude of the sponsor community, and plenty of planned fund raisings, we heard one theme repeated over and over again that threatens the broader asset management world: stretched valuations.

In the Eye of the Beholder: Increasing SEC Scrutiny of Public Company Fair Value Marks

In an article published in August 2015, NERA Economic Consulting examined some of the effects of the SEC’s increasing use of quantitative analysis to identify potential problematic valuations in public company filings. Although the SEC previously used its tools in the private fund advisor sphere, the agency is beginning to turn its gaze to publicly traded companies. Thus far, the SEC’s focus has been on two main points, valuation policies that differ from actual valuation practices (including valuation methods and approaches, as well as the inputs used) and the incorporation of market conditions (or lack thereof).

Unicorn Valuations: What’s Obvious Isn’t Real, and What’s Real Isn’t Obvious

In the two short years since Aileen Lee introduced the term “unicorn” into the VC parlance, the number of such companies has steadily increased from the 39 identified by Lee’s team at Cowboy Ventures to nearly 150 (and growing weekly) by most current estimates. Pundits and analysts have offered a variety of explanations for the phenomenon, with some identifying unicorns as the sign that the tech bubble of the late 1990s has returned under a different guise, others attributing the existence of such companies to structural changes in how innovation is funded in the economy, and the most intrepid of the group suggesting that the previously undreamt valuations are fully supported by the underlying fundamentals given the maturity and ubiquity of the internet, smart phones, tablets, and related technologies.

Yes, Virginia, the Cost of Capital Really Is Low

Because of the wide availability of low-cost debt, even a “hefty” purchase multiple does not necessarily obliterate prospective equity returns. Berkshire Hathaway’s purchase of Precision Castparts provides a timely illustration of the practical effect of the Fed’s accommodative monetary policy on corporate costs of capital and valuation multiples.

Rules for the Modern Investment Manager

On May 20, 2015, the Securities and Exchange Commission proposed new rules and amendments to modernize and enhance information reported by investment companies and investment advisers. The proposed rules would be applicable to most investment companies registered under the Investment Company Act of 1940 and all investment advisers registered under the Investment Advisers Act of 1940.

Portfolio Marks: 2Q15 Outlook

With the second quarter drawing to a close, private equity managers can look forward to a fresh round of portfolio valuation marks. We recently pulled some historical gains and losses reported by publicly-traded BDCs to help provide some context as we look to the upcoming valuation marks.

A Capital Raise in Acquisition Clothing?

M&A has not been a common occurrence among BDCs. Under the external management model, the opportunity for material cost savings is limited, and prices at or near NAV indicate that investors assign little “franchise” value to the lending and origination platforms. The recently announced acquisition of MCG Capital (MCGC) by PennantPark Floating Rate Capital Ltd. (PFLT) is likely the exception that proves the rule. In the conference call describing the transaction, PFLT’s chairman Arthur Penn aptly described the acquisition as a “synthetic equity” raise for PFLT.

How to Value Venture Capital Portfolio Investments

In this post we describe our process when providing periodic fair value marks for venture capital fund investments in pre-public companies. This process includes examining the most recent financing round economics, adjusting valuation inputs the measurement date, measuring fair value, and reconciling and testing for reasonableness.

Second Fairness Opinions

The fairness opinion states that a transaction is fair from a financial point of view of the subject company’s shareholders. The opinion does not express a view about where a security may trade in the future; nor does it offer a view as to why a board elected to take a certain action. Valuation is at the heart of a fairness opinion, though valuation typically is a range concept that may (or may not) encompass the contemplated transaction value.