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					Private Equity Valuation
Survey Results
     Foster Center for Private Equity
     Tuck School of Business at Dartmouth



     May 2003
   Contents

          Section                                      Slides
                 Introduction                           3-4
                 Executive summary                      5-6
                 Survey population and respondents      7-8
                 Analysis and discussion of results    9-39
                 Acknowledgements                       39
                 About the center for private equity    40




                                                                2
Foster Center for Private Equity
    Introduction

     This presentation is a detailed analysis of the results of a
     survey on guidelines, policies, and practices for valuation in
     the private equity industry (both venture capital and buyout).

     The survey was conducted by the Foster Center for Private
     Equity at the Tuck School of Business at Dartmouth College.
     Over 700 firms of all sizes and geographical locations within
     the US received the survey.

     Phase I of the study (survey of venture firms) was completed
     from April to July of 2002. Phase II of the study (survey of
     buyout firms) was completed from January to March of 2003.


                                                                      3
Foster Center for Private Equity
   Introduction (continued)

     Phase III of the project will identify all commonly used
     valuation practices and, by means of a survey, will determine
     the most useful and acceptable components of a valuation
     guideline. This will be conducted in the Winter of 2003.




                                                                     4
Foster Center for Private Equity
   Executive summary

   • 368 out of 738 participants responded to the survey (48%).
     Of these, 230 are primarily venture focused (62%) and 138
     are primarily buyout focused (38%).
   • Both venture and buyout firms indicate that an industry-wide
     valuation standard is important and have a real interest in
     seeing one developed.
   • However, firms also see challenges to developing a
     standard and have real differences of opinion about specific
     details of a standard.
   • More than half of the respondents prefer that a private
     equity industry association take the lead in developing
     reporting standards.
                                                                  5
Foster Center for Private Equity
   Executive summary (continued)

   • Firms report that improved LP reporting and greater
     transparency will be the benefits of a standard.
   • 51% of firms report that they are aware of existing valuation
     proposals and standards (NVCA, BVCA or EVCA)
   • However, only 30% of firms acknowledge that they use the
     existing proposals/standards as a basis for internal
     guidelines.
   • In comparing venture and buyout, 63% of venture firms that
     were aware of existing proposals/standards use one as a
     basis for internal guidelines, compared to only 47% for
     buyout firms.
   • 46% of firms would like to be part of the process of creating
     an industry valuation standard.
                                                                     6
Foster Center for Private Equity
   Characteristics of survey respondents


                                     Size of Last Fund Raised
                72%

                                                                     51%


                                                                                    22%            23%
                                   17%
                                           10%

            Last fund         Last fund   Last fund               Last fund      Last fund      Last fund
            < $250M            $251 to    > $750M                 < $250M         $251 to       > $750M
                                $750M                                              $750M



                  Venture Firms                                          Buyout Firms

       Note: percentages do not add to 100% because some survey participants did not respond to the question
                                                                                                               7
Foster Center for Private Equity
   Characteristics of survey respondents


                                             Year of First Fund

                                   56%
                                                                                         50%


                                                                              29%
                        21%
                                              14%                                                   12%
            6%                                                     3%

          1980 or      1980 to     1990 to    2000 or            1980 or    1980 to     1990 to    2000 or
          before        1989        1999       after             before      1989        1999       after



                  Venture Firms                                            Buyout Firms

       Note: percentages do not add to 100% because some survey participants did not respond to the question
                                                                                                               8
Foster Center for Private Equity
   Almost 50% of firms would like to see an
   industry valuation standard



                                   46%

                                          30%
                                                    23%



                                   Yes   Not Sure    No


     Question: Would you like to see an industry standard for valuation
               practices?
                                                                          9
Foster Center for Private Equity
   Venture firms are slightly more in favor of an
   industry valuation standard


                                   48%                  43%

                48%
                                               43%

                                   30%                   30%
                                                               25%
                                         21%




               Yes            Not Sure   No    Yes        No   Not Sure




                     Venture Firms                   Buyout Firms


                                                                          10
Foster Center for Private Equity
      Small venture firms are comparatively more
      interested in an industry standard

                                                 Venture Firms

                         51%                              41%                                41%
60%                                      60%                             60%
        51%
50%                                      50%                             50%
                                                 41%                           41%
40%                                      40%                      36%    40%
                     32%                                                               32%
30%                                      30%                             30%
                                                                                                   27%
                                                         23%
20%                                16%   20%                             20%

10%                                      10%                             10%

0%                                       0%                              0%
       Yes       Not Sure          No            Yes   Not Sure   No           Yes   Not Sure      No


         Smaller Funds                              Mid Size Funds                Larger Funds
       Last fund < $250M                       Last fund $251M - $750M          Last fund > $750M



                                                                                                         11
Foster Center for Private Equity
      Small and midsize buyout firms are also more
      interested in an industry valuation standard

                                                 Buyout Firms

                         44%                               48%                        34%
50%                                      60%                             60%
        44%
45%
                                         50%
                                                 48%                     50%
40%
35%                                31%                   35%                           38%
30%
                                         40%                             40%   34%
                     24%
25%                                      30%                             30%                    25%
20%
                                         20%                      16%    20%
15%
10%
                                         10%                             10%
5%
0%                                       0%                              0%
       Yes       Not Sure          No            Yes   Not Sure   No           Yes   Not Sure   No


         Smaller Funds                              Mid Size Funds                Larger Funds
       Last fund < $250M                       Last fund $251M - $750M          Last fund > $750M



                                                                                                     12
Foster Center for Private Equity
   Write-in comments provide added support for an
   industry valuation standard

     • 123 of 368 firms (33%) provided write-in comments on the
       positive or negative aspects of a valuation standard

     • 93 of the 123 (76%) indicate that an industry standard
       would benefit the industry. Most comments state that a
       standard would help improve the comparability between
       funds, reporting, and transparency.

     • However, 25 of 123 firms (20%) state that a standard would
       not be a benefit. Most comments indicate that inefficiency
       and lack of transparency are good for the industry and a
       standard would be either too restrictive or vague (i.e. a one-
       size fits all standard is not appropriate).

                                                                   13
Foster Center for Private Equity
   Typical positive comments include

     • “An industry-wide valuation standard would develop a level
       playing field, LPs with interests in a number of funds could
       properly evaluate performance of the fund and avoid having
       one fund value an investment at 100% and another at 50%,
       for ex. It would be nice to have one standard.”

     • “The very survival of the PE industry is dependent on
       waking up to the need for real and dependable uniformity in
       valuation.”

     • “An industry-wide valuation standard would put more
       pressure on private equity firms to honestly report on the
       financial condition and equity value of their portfolio
       companies.”
                                                                    14
Foster Center for Private Equity
   Typical negative comments include

     • “I assume that you are referring to standard valuation
       practices. I do not see significant benefit. In fact, it could
       serve to hurt returns, if sellers and their agents learn of
       such standardized valuation methodology.”

     • “MUCH prefer the way it is today ... industry thrives on the
       'gray' of valuation … interim returns would be estimates,
       and poor predictors of long term value in portfolio, thus very
       harmful to GP”

     • “Don't see a benefit of industry wide standards, each firm
       would be well-advised to have their own process. If you
       don't know what it's worth, you shouldn't be in the
       business!”
                                                                        15
Foster Center for Private Equity
   Many firms report that an industry valuation
   standard is “important” or “very important”


                                                    38%
                                                                               36%
                                                                27%
                                        22%

                                                                             9%
                            4%

                        Insignificant      Not      Somewhat    Important     Very
                                        Important   Important               Important




                                                                                        16
Foster Center for Private Equity
   Comparatively, more venture firms report that a
   standard is “important” or “very important”



                                                                                   41%
                             36%                  38%
                                       30%                                                               33%
                  23%                                                    22%                  23%

                                             8%                                                     10%
        3%                                                      4%

          1          2             3    4    5                    1         2         3        4     5


                 Venture Firms                                           Buyout Firms




                                             Scale: 1 = Insignificant to 5 = Very Important
                                                                                                               17
Foster Center for Private Equity
           Small venture firms place a higher importance on
           an industry valuation standard

                                                    Venture Firms

60%                                          60%                                        60%

50%                                      41% 50%               44%                      50%                  45%
                                                                                28%                                       28%
40%                                          40%                                        40%
                   33% 33%
30%         23%                              30%        23%                             30%          23%           23%
                                                                      18%
20%                                          20%                                        20%
                                   8%                                         10%
10%
      2%                                     10%   5%                                   10%   5%                         5%
0%                                            0%                                         0%
      1      2       3       4       5              1    2       3      4      5               1         2   3     4     5

            Smaller Funds                               Mid Size Funds                               Larger Funds
          Last fund < $250M                        Last fund $251M - $750M                         Last fund > $750M




                                                        Scale: 1 = Insignificant to 5 = Very Important
                                                                                                                              18
      Foster Center for Private Equity
           About one-third of buyout firms report that a
           standard is “important” or “very important”

                                                      Buyout Firms
60%                                            60%                                        60%

50%                                            50%                                        50%
                                                                                                               47%
                   39%                   31%                     42%              32%                                       34%
40%                                            40%                                        40%

30%                                            30%        26%                             30%                        25%
            21%            21%                                          19%                            19%
20%                                            20%                              13%       20%
      7%                           10%                                                                                     9%
10%                                            10%                                        10%
                                                     0%                                         0%
0%                                             0%                                          0%
      1      2       3       4       5                1    2       3      4      5               1         2   3     4     5

            Smaller Funds                                 Mid Size Funds                               Larger Funds
          Last fund < $250M                          Last fund $251M - $750M                         Last fund > $750M




                                                          Scale: 1 = Insignificant to 5 = Very Important
                                                                                                                                19
      Foster Center for Private Equity
           Firms indicate that there will be real benefits if a
           standard is developed

              Improved LP                            Provide greater                            Improved calculation
                reporting                                industry                                 of interim returns
                                                      transparency

55%        55%                            55%        46%                             55%
                            43%                                                                           36%
45%                                       45%                                        45%
                                                                   36%
35%                 29%                   35%               30%                      35%                   31%
                                                                                                  26%            26%
25%                                       25%        18%                             25%
            13%                     12%                                    10%                                         10%
15%                                       15%                                        15%
      3%                                        5%                                         6%
5%                                        5%                                          5%

-5%   1      2       3       4       5    -5%   1      2      3       4      5       -5%    1         2     3     4     5




                                                     Scale: 1 = Insignificant to 5 = Very Important
                                                                                                                            20
      Foster Center for Private Equity
   Both venture and buyout firms acknowledge that
   improved LP reporting will be a benefit


                                           54%                                                        57%

                                                                                           46%
                                   42%

                            30%                                                28%

                 13%                     12%                         12%                         11%
       4%                                                   2%

         1          2          3    4     5                   1         2         3         4     5


               Venture Firms                                         Buyout Firms



                                          Scale: 1 = Insignificant to 5 = Very Important
                                                                                                            21
Foster Center for Private Equity
   Venture and buyout firms also indicate that
   improved transparency will be a benefit


                                           49%                                                       42%


                                   38%
                                                                               32%         33%
                            29%
                                                                     21%
                 17%
                                         11%                                                     9%
       6%                                                   4%

         1          2          3    4     5                   1         2         3         4    5


               Venture Firms                                         Buyout Firms



                                          Scale: 1 = Insignificant to 5 = Very Important
                                                                                                           22
Foster Center for Private Equity
           Firms indicate that there will be significant
           challenges to developing a standard

           Low likelihood of                   Difficulty in designing                       Concerns about the
           agreement among                      the components of                        confidentiality of individual
            industry players                      a single standard                         company valuations


55%        75%                           55%        73%                            55%
                           43%                                   41%                                     52%
45%                                      45%                                       45%

35%                                32%   35%                             32%       35%                             29%
                                                                                                    24% 23%
25%                18%                   25%              19%                      25%          20%
15%                                      15%                                       15%
             6%                                      6%                                  3%
5%    0%                                 5%    1%                                   5%

-5%   1      2      3       4       5    -5%   1     2      3       4      5       -5%    1          2     3   4    5




                                                    Scale: 1 = Insignificant to 5 = Very Important
                                                                                                                         23
      Foster Center for Private Equity
   Venture and buyout firms are both concerned with
   the low likelihood of agreement in the industry


                                           76%                                                        72%

                                   43%                                                     42%
                                         33%
                                                                                                 30%
                                                                               21%
                            17%
                  6%                                                  7%
       0%                                                   0%

         1          2          3    4     5                   1         2         3         4     5


               Venture Firms                                         Buyout Firms



                                          Scale: 1 = Insignificant to 5 = Very Important
                                                                                                            24
Foster Center for Private Equity
     However, large venture firms are particularly
     concerned with low likelihood of agreement

                                          Venture Firms

                                                                                               91%
         76%                                   70%
                                                                                                          55%
                                                              49%
                        41%
                                   35%                                                                          36%
                                                       23%            21%
                17%
        7%                                      5%                                             5%    5%
1%                                       0%                                          0%
 1       2       3       4         5      1      2       3      4      5               1       2     3     4    5

    Smaller Funds                             Mid Size Funds                              Larger Funds
  Last fund < $250M                      Last fund $251M - $750M                        Last fund > $750M




                                              Scale: 1 = Insignificant to 5 = Very Important
                                                                                                                 25
Foster Center for Private Equity
   Firms are equally concerned with the difficulty of
   designing components of a single standard


                                           74%                                                        71%


                                   41%                                                     41%
                                         33%
                                                                                                 30%

                            18%                                                20%

                                                                      8%
                  5%
       2%                                                   1%

         1          2          3    4     5                   1         2         3         4     5


               Venture Firms                                         Buyout Firms



                                          Scale: 1 = Insignificant to 5 = Very Important
                                                                                                            26
Foster Center for Private Equity
     However, larger venture firms are more concerned with
     difficulty in designing components of a single standard


                                          Venture Firms

                                                                                                    83%
                                               79%
      73%                                                                                                       55%
                                                              51%
                        41%
                                   32%                                28%                                 27%
                19%                                    15%                                          18%
2%      6%                                      3%
                                         0%                                          0%        0%
 1       2       3       4         5      1      2       3      4      5               1       2     3     4    5

    Smaller Funds                             Mid Size Funds                              Larger Funds
  Last fund < $250M                      Last fund $251M - $750M                        Last fund > $750M




                                              Scale: 1 = Insignificant to 5 = Very Important
                                                                                                                 27
Foster Center for Private Equity
   Firms are concerned with the confidentiality of
   individual company valuations


                                                                                       50%
                              54%
                                                                                                     33%
                                   27%   27%
                          24%                                             23%       23%
               17%                                                                             17%


     3%                                                          2%

       1          2          3      4     5                       1         2         3        4     5


              Venture Firms                                              Buyout Firms




                                              Scale: 1 = Insignificant to 5 = Very Important
                                                                                                           28
Foster Center for Private Equity
     Midsize buyout firms are especially concerned about
     the confidentiality of company valuations

                                           Buyout Firms


                                                     65%
             48%                                                      55%                           47%

       26% 26%                     29%                                                         25% 28%          28%
                        19%                                                                               19%
                                               13% 16% 10%
                                         6%
1%                                                                                   0%
 1       2       3       4         5      1      2       3      4      5               1        2   3      4    5

    Smaller Funds                             Mid Size Funds                              Larger Funds
  Last fund < $250M                      Last fund $251M - $750M                        Last fund > $750M




                                              Scale: 1 = Insignificant to 5 = Very Important
                                                                                                                 29
Foster Center for Private Equity
     Venture firms are more likely to carry pre-IPO investments
     at cost with adjustments for subsequent financing events


              How firms report carrying pre-IPO
              investments                                                      Venture        Buyout

              At cost with adjustments for subsequent
                                                                                  84%            50%
              financing events for significant deterioration

              At cost w/ no interim adjustments prior to
                                                                                  5%             13%
              exit

              Marked to market using public company
                                                                                  1%              9%
              comparables and illiquidity discounts




          Note: percentages do not add to 100% because some survey participants provided alternative answers
          or did not respond to the question

                                                                                                               30
Foster Center for Private Equity
     Venture firms are more likely to revalue a
     company when new outside financing occurs

           What events cause firms to revalue a
           portfolio company investment                Venture   Buyout

           New outside financing                        89%       66%

           Missed milestones                            55%       41%

           Major changes in relevant industry sector    46%       43%

           New strategic investor                       45%       41%

           New inside financing                         23%       23%

           Other, please specify                        17%       17%

           Don't use cost method                         3%       6%


                                                                          31
Foster Center for Private Equity
    Venture firms are more likely to revalue portfolio
    companies quarterly


                      Venture Firms                                       Buyout Firms
                          66%


                                                                             43%
                                                                                                    29%

                                    9%                                                   12%
             5%                                6%
                                                                  1%

           Monthly Quarterly        Semi- Annually               Monthly Quarterly       Semi- Annually
                                   Annually                                             Annually



          Note: percentages do not add to 100% because some survey participants provided alternative answers
          or did not respond to the question
                                                                                                               32
Foster Center for Private Equity
    Venture firms are more aware of existing
    valuation standards

                      Venture Firms                                    Buyout Firms

                                   57%
                57%                                                             41%
                            52%
                                                                    41%
                                                                              36%

                                         21%                                             19%
                                                12%                                                    9%


                 ANY        NVCA         EVCA   BVCA                ANY       NVCA      EVCA       BVCA


      The proposed 1990 NVCA guideline is most the most widely known
      standard for US firms

                                                                                                            33
Foster Center for Private Equity                  Any indicates either the NVCA, EVCA, BVCA or Other
   Large venture firms are more aware of current
   standards compared to small venture firms

                                            Venture Firms

                                                  74%                                   68%
              50%                         74%
                                                                               68%     68%
                                                 62%
  50%       47%
                                                         38%
                                                                                                27%   27%
                                                                  23%
                      16%
                                   7%

 ANY NVCA EVCA BVCA                      ANY NVCA EVCA BVCA                   ANY NVCA EVCA BVCA

    Smaller Funds                            Mid Size Funds                       Larger Funds
  Last fund < $250M                     Last fund $251M - $750M                 Last fund > $750M




                                                                                                       34
Foster Center for Private Equity                Any indicates either the NVCA, EVCA, BVCA or Other
     Venture firms are more likely to use existing
     standards as the basis for internal guidelines

                     Venture Firms                                   Buyout Firms

                           36%

              36%                                                           20%
                          33%

                                                                 20%
                                                                           16%

                                   6%                                                  8%
                                          4%                                                     2%

              ANY         NVCA     EVCA   BVCA                   ANY       NVCA       EVCA      BVCA



      The proposed 1990 NVCA guideline is most the most widely used
      standard for US firms

                                                                                                       35
Foster Center for Private Equity                 Any indicates either the NVCA, EVCA, BVCA or Other
   Midsize and large venture firms are more likely to use
   existing standards as the basis for internal guidelines

                                           Venture Firms

                                                 41%                                   41%
              33%
                                         41%                                  41%
                                               36%                                    36%
  33%       32%


                                                       10%      10%                            9%
                       4%          3%                                                               5%

 ANY NVCA EVCA BVCA                      ANY NVCA EVCA BVCA                  ANY NVCA EVCA BVCA

    Smaller Funds                            Mid Size Funds                      Larger Funds
  Last fund < $250M                     Last fund $251M - $750M                Last fund > $750M



                                                                                                     36
Foster Center for Private Equity               Any indicates either the NVCA, EVCA, BVCA or Other
     When aware of existing standards, venture firms
     are more likely to use them for internal guidelines

                     Venture Firms                                   Buyout Firms

                          63%

              63%         63%
                                                                           47%

                                                                47%        45%        42%
                                          36%
                                   27%
                                                                                                23%




              ANY         NVCA     EVCA   BVCA                   ANY       NVCA       EVCA      BVCA


      The proposed 1990 NVCA guideline is most the most widely used
      standard for US firms

                                                                                                       37
Foster Center for Private Equity                 Any indicates either the NVCA, EVCA, BVCA or Other
     Firms indicate that a PE industry association
     should lead the effort if a standard is developed


        51%



                         14%
                                     9% 5%
                                           4% 2% 3%




      Note: percentages do not add to 100% because some survey participants provided alternative answers
                                                                                                           38
Foster Center for Private Equity
                                      PE Industry
                                      Association




                                                                      55%
                                       LP Industry
                                       Association




                                                      13%




Foster Center for Private Equity
                                   New PE Industry




                                                     6%
                                       Association
                                                                            Venture Firms




                                       Accounting
                                       Association   5%




                                      PE Industry
                                                                43%




                                      Association


                                       LP Industry
                                                          16%




                                       Association


                                   New PE Industry
                                                      13%




                                       Association
                                                                            Buyout Firms
                                                                                            industry association should lead the effort




                                       Accounting
                                                     7%




                                       Association
                                                                                            Both venture and buyout firms report that a PE




                         39
    46% of firms surveyed would like to be part of the
    process of creating industry standards



                                          52%
                                   46%




                                                  2%

                                    Yes   No      No
                                                Answer



                                                         40
Foster Center for Private Equity
     Venture firms are more interested in being part of
     the process of creating an industry standard


                                                            54%
                                   51%
                47%                                  44%




                                            2%                        1%

                 Yes               No    No Answer   Yes     No   No Answer




                     Venture Firms                     Buyout Firms



                                                                              41
Foster Center for Private Equity
    Acknowledgements

     • The survey questionnaire was developed by Professor
       Colin Blaydon with the assistance of Foster Center staff
       and Tuck Business School Students.
     • The analysis and presentation of the survey results were
       conducted by:
             Professor Colin Blaydon
             Professor Fred Wainwright
             Professor Michael Horvath
             Sean Ruhmann (Tuck Class of 2003)



                                                                  42
Foster Center for Private Equity
    About the Foster Center for Private Equity

       The Foster Center for Private Equity focuses on macro and micro issues relating to private
       equity: capital markets, financing structures, governance and entrepreneurship. It is actively
       involved in the practitioner communities of private equity, both to gain information about current
       trends and challenges and to share insights and solutions. The center interacts with institutional
       investors, venture capitalists, buy-out investors, corporate venturers, angel investors,
       entrepreneurs, portfolio companies, industry lawyers and accountants, industry associations, and
       the media. Through these outreach efforts, the center also promotes networking that facilitates
       the pursuit of venture-backed activities.

       A thought leader in the field of private equity, the Foster Center's work is represented in
       prestigious publications and industry conferences. The center is a regular contributor to the
       Venture Capital Journal, the leading industry magazine, and its directors are often sought out as
       authorities by top business publications, such as The Wall Street Journal. The center seeks to
       educate Tuck students in entrepreneurship and private equity investing through such courses as
       Private Equity Finance, Advanced Entrepreneurship, Field Studies in Private Equity and through
       supporting internships, fellowships and independent studies.

       For additional information on the Foster Center: http://mba.tuck.dartmouth.edu/pecenter/



                                                                                                      43
Foster Center for Private Equity

				
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