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I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L VA L U AT I O N G U I D E L I N E S These guidelines have been developed by the Association Française des Investisseurs en Capital (AFIC), the British Venture Capital Association (BVCA) and the European Private Equity and Venture Capital Association (EVCA) with the valuable input and endorsement of the following associations: AIFI, Italy - APCRI, Portugal - APEA, Arab countries - ASCRI, Spain - ATIC, Tunisia - AVCA, Africa AVCAL, Australia - AVCO, Austria - BVA, Belgium - BVK, Germany - CVCA, Canada - CVCA, Czech Republic DVCA, Denmark - FVCA, Finland - HKVCA, Hong Kong - HVCA, Hungary - ILPA - IVCA, Ireland - LVCA, Latvia NVCA, Norway - NVP, The Netherlands - PPEA, Poland - Réseau Capital, Quebec - RVCA, Russia SAVCA, South Africa - SECA, Switzerland - SLOVCA, Slovakia (Endorsement as of 1st of November 2005) I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) P L EA S E N OT E The information contained within this paper has been produced with reference to the contributions of a number of sources. AFIC, BVCA and EVCA have taken suitable steps to ensure the reliability of the information presented. However, neither AFIC, BVCA, EVCA nor other named contributors, individuals or associations can accept responsibility for any decision made or action taken, based upon this paper or the information provided herein. For further information please visit: www.privateequityvaluation.com I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 4 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, DVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RVCA, SAVCA, SECA, SLOVCA P R E FAC E These Guidelines set out recommendations, intended to represent current best practice, on the valuation of private equity and venture capital investments. The term “private equity” is used in these Guidelines in a broad sense to include investments in early stage ventures, management buyouts, management buy-ins and similar transactions and growth or development capital. The recommendations are intended to be applicable across the whole range of investment types (seed and start-up venture capital, buy-outs, growth/development capital, etc) and financial instruments commonly held by private equity funds. The recommendations themselves are set out in bold type, whereas explanations, W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M illustrations, background material, context and supporting commentary, which are provided to assist in the interpretation of the recommendations, are set out in normal type. Where there is conflict between a recommendation contained in these Guidelines and the requirements of any applicable laws or regulations or accounting standard or generally accepted accounting principle, the latter requirements should take precedence. Neither the AFIC, BVCA, EVCA nor the endorsing associations nor the members of any committee or working party thereof can accept any responsibility or liability whatsoever (whether in respect of negligence or otherwise) to any party as a result of anything contained in or omitted from the Valuation Guidelines nor for the consequences of reliance or otherwise on the provisions of these Valuation Guidelines. These Valuation Guidelines should be regarded as superseding previous guidelines issued by the AFIC, BVCA or EVCA with effect for reporting periods post 1 January 2005. I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) CO N T E N TS INTRODUCTION 7 Definitions 7 SECTION I: DETERMINING FAIR VALUE 9 1 The Concept of Fair Value 9 2 Principles of Valuation 9 3 Valuation Methodologies 12 3.1 General 12 3.2 Selecting the Appropriate Methodology 13 3.3 Price of Recent Investment 14 3.4 Earnings Multiple 15 3.5 Net Assets 20 3.6 Discounted Cash Flows or Earnings (of Underlying Business) 21 3.7 Discounted Cash Flows (from the Investment) 22 3.8 Industry Valuation Benchmarks 23 3.9 Available Market Prices 23 SECTION II: APPLICATION GUIDANCE 27 Introduction 27 1 Selecting the Appropriate Methodology 27 2 Specific Considerations 29 2.1 Internal Funding Rounds 29 2.2 Bridge Financing 29 2.3 Mezzanine Loans 30 2.4 Rolled up Loan Interest 30 2.5 Indicative Offers 31 3 Events to Consider for their Impact on Value 31 4 Impacts from Structuring 33 WORKGROUP 35 INTRODUCTION INTRODUCTION However, the requirements and and a valuation methodology (such as implications of the Financial Reporting the earnings multiple technique), which Private Equity Managers may be Standards and in particular International details the method or technique for required to carry out periodic valuations Financial Reporting Standards and US deriving a valuation. of Investments as part of the reporting GAAP have been considered in the process to investors in the Funds they preparation of these guidelines. This has manage. The objective of these Guidelines been done, in order to provide a frame- is to set out best practice where private work for arriving at a Fair Value for equity Investments are reported at “Fair private equity and venture capital DEFINITIONS Value”, with a view to promoting best Investments which is consistent with The following definitions shall apply in practice and hence helping investors in accounting principles. these Guidelines. Private Equity Funds make better These guidelines are intended to represent economic decisions. current best practice and therefore will Enterprise Value The increasing importance placed by be revisited and, if necessary, revised to The Enterprise Value is the value of international accounting authorities on reflect changes in international the financial instruments representing Fair Value reinforces the need for the regulation or accounting standards. ownership interests in an entity plus consistent use of valuation standards These Guidelines are concerned with the net financial debt of the entity. worldwide and these guidelines provide a valuation from a conceptual standpoint framework for consistently determining and do not seek to address best practice Fair Value valuations for the type of Investments as it relates to investor reporting, held by private equity and venture The Fair Value is the amount for which internal processes, controls and capital entities. an asset could be exchanged between procedures, governance aspects, knowledgeable, willing parties in an The accounts of Private Equity Funds Committee oversights, the experience arm’s length transaction. are governed by legal or regulatory and capabilities required of the Valuer provisions or by contractual terms. It is or the audit or review of valuations. not the intention of these Guidelines to A distinction is made in these Guidelines prescribe or recommend the basis on between a basis of valuation (such as which Investments are included in the Fair Value), which defines what the accounts of Funds. carrying amount purports to represent, 7 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 8 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) Fund Marketability Quoted Instrument The Fund, i.e. a private equity or Marketability is defined as the relative ease A Quoted Instrument is any financial venture capital fund, is the generic term and promptness with which an instrument instrument for which quoted prices used in these Guidelines to refer to any may be sold when desired. Marketability reflecting normal market transactions are designated pool of investment capital implies the existence of current buying readily and regularly available from an targeted at private equity Investment, interest as well as selling interest. exchange, dealer, broker, industry group, including those held by corporate pricing service or regulatory agency. entities, limited partnerships and other Marketability Discount investment vehicles. Realisation The Marketability Discount is the consequence of the return Market Realisation is the sale, redemption or Gross Attributable Enterprise Value Participants demand to compensate repayment of an Investment, in whole or The Gross Attributable Enterprise Value for the risk arising from the lack in part; or the insolvency of an Investee is the Enterprise Value attributable to the of Marketability. Company, where no significant return to financial instruments held by the Fund the Fund is envisaged. and other financial instruments in the Market Participants entity that rank alongside or beneath the Unquoted Instrument Market Participants are potential or highest ranking instrument of the Fund. actual willing buyers or willing sellers An Unquoted Instrument is any financial when neither is under any compulsion instrument other than a Quoted Instrument. Investee Company to buy or sell, both parties having The term Investee Company refers to a reasonable knowledge of relevant facts Underlying Business single business or group of businesses in and who have the ability to perform The Underlying Business is the which a Fund is directly invested. sufficient due diligence in order to be operating entities in which the Fund has able to make investment decisions invested, either directly or through a Investment related to the enterprise. number of dedicated holding companies. A Fund’s Investment refers to all of the Net Attributable Enterprise Value financial instruments in an Investee Valuer Company held by the Fund. The Net Attributable Enterprise Value The Valuer is the person with direct is the Gross Attributable Enterprise responsibility for valuing one or more Value less a Marketability Discount. of the Investments of the Fund. S EC T I O N I: D E T E R M I N I N G F A I R V A LU E 1 THE CO N C E P T O F F A I R V A LU E 2 PRINCIPLES OF V A LU AT I O N Fair Value is the amount for which an asset could be Investments should be reported at Fair Value at the exchanged between knowledgeable, willing parties in an arm’s reporting date. length transaction. In the absence of an active market for a financial instrument, The estimation of Fair Value does not assume either that the the Valuer must estimate Fair Value utilising one of the Underlying Business is saleable at the reporting date or that valuation methodologies. its current shareholders have an intention to sell their holdings In estimating Fair Value for an Investment, the Valuer in the near future. should apply a methodology that is appropriate in light of The objective is to estimate the exchange price at which the nature, facts and circumstances of the Investment and hypothetical Market Participants would agree to transact. its materiality in the context of the total Investment portfolio and should use reasonable assumptions and Fair Value is not the amount that an entity would receive or estimates. pay in a forced transaction, involuntary liquidation or distressed sale. In private equity, value is generally crystallised through a sale or flotation of the entire business, rather than a sale of an Although transfers of shares in private businesses are often individual stake. Accordingly the Value of the business as a subject to restrictions, rights of pre-emption and other whole (Enterprise Value) will provide a base for estimating barriers, it should still be possible to estimate what amount a the Fair Value of an Investment in that business. willing buyer would pay to take ownership of the Investment. The Fair Value is estimated by the Valuer, whichever valuation methodologies are used, from the Enterprise Value, as follows: (i) Determine the Enterprise Value of the Investee Company using the valuation methodologies; (ii) Adjust the Enterprise Value for surplus assets, or excess/unrecorded liabilities and other relevant factors; 9 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 10 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) (iii) Deduct from this amount any financial instruments As such, it must be recognised that, whilst valuations do provide ranking ahead of the highest ranking instrument of useful interim indications of the progress of a particular the Fund in a liquidation scenario and taking into Investment or portfolio of Investments, ultimately it is not account the effect of any instrument that may dilute until Realisation that true performance is firmly apparent. the Fund’s Investment to derive the Gross Attributable Fair Value should reflect reasonable estimates and Enterprise Value; assumptions for all significant factors that parties to an arm’s (iv) Apply an appropriate Marketability Discount to the length transaction would be expected to consider, including Gross Attributable Enterprise Value to derive the Net those which impact upon the expected cash flows from the Attributable Enterprise Value; Investment and upon the degree of risk associated with those cash flows. (v) Apportion the Net Attributable Enterprise Value between the company’s relevant financial instruments In assessing the reasonableness of assumptions and estimates, according to their ranking; the Valuer should: (vi) Allocate the amounts derived according to the Fund’s • note that the objective is to replicate those that the parties in holding in each financial instrument, representing their an arm’s-length transaction would make; Fair Value. • take account of events taking place subsequent to the It is important to recognise the subjective nature of private reporting date where they provide additional evidence of equity Investment valuation. It is inherently based on conditions that existed at the reporting date; and forward-looking estimates and judgments about the • take account of materiality considerations. Underlying Business itself, its market and the environment in which it operates, the state of the mergers and acquisitions Because of the uncertainties inherent in estimating Fair market, stock market conditions and other factors. Value for private equity Investments, a degree of caution should be applied in exercising judgment and making the Due to the complex interaction of these factors and often the necessary estimates. However, the Valuer should be wary lack of directly comparable market transactions, care should be of applying excessive caution. applied when using publicly available information in deriving a valuation. In order to determine the Fair Value of an Investment, Private Equity Funds often undertake an Investment with the Valuer will have to exercise judgement and make necessary a view to effecting substantial changes in the Underlying estimates to adjust the market data to reflect the potential Business, whether it be to its strategy, operations, management, impact of other factors such as geography, credit risk, foreign or whatever. Sometimes these situations involve rescue currency and exchange price, equity prices and volatility. refinancing or a turnaround of the business in question. S EC T I O N I: D E T E R M I N I N G F A I R V A LU E Whilst it might be difficult in these situations to determine In situations where Fair Value cannot be reliably measured Fair Value based on a transaction involving a trade purchaser, the Investment should be reported at the carrying value at it should in most cases be possible to estimate the amount a the previous reporting date as the best estimate of Fair Value, Private Equity Fund would pay for the Investment in question. unless there is evidence that the Investment has since then been impaired. In such a case the carrying value should be The Valuer will need to assess whether, in the particular reduced to reflect the estimated extent of impairment. circumstances of a specific Investment, he is able reliably to measure Fair Value by applying generally accepted In respect of Investments for which Fair Value cannot be methodologies in a consistent manner based on reasonable reliably measured, the Valuer is required to consider whether assumptions. events or changes in circumstances indicate that an impairment may have occurred. There may be situations where: Where an impairment has occurred, the Valuer should reduce • the range of reasonable Fair Value estimates is significant the carrying value of the Investment to reflect the estimated • the probabilities of the various estimates within the range extent of impairment. Since the Fair Value of such cannot be reasonably assessed Investments cannot be reliably measured, estimating the extent of impairment in such cases will generally be an • the probability and financial impact of achieving a key intuitive (rather than analytical) process and may involve milestone cannot be reasonably predicted reference to broad indicators of value change (such as relevant • there has been no recent Investment into the business. stock market indices). In these situations, the Valuer should conclude that Fair Value cannot be reliably measured. 11 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 12 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) 3 V A LU AT I O N M E T H O D O LO G I E S In determining the Fair Value of an Investment, the Valuer should use judgement. This includes a detailed 3.1 General consideration of those specific terms of the Investment which may impact its Fair Value. In this regard, the A number of valuation methodologies that may be considered Valuer should consider the substance of the Investment, for use in estimating the Fair Value of Unquoted which takes preference over the strict legal form. Instruments are described in sections 3.3 to 3.9 below. These methodologies should be amended as necessary to It is important conceptually to distinguish the value that incorporate case-specific factors affecting Fair Value. may be ascribed to an Investment from the value that may For example, if the Underlying Business is holding surplus be ascribed to the Underlying Business. For example, in cash or other assets, the value of the business should reflect valuing the Underlying Business one may seek to estimate that fact. the amount a buyer would pay for the business at the reporting date. In valuing an Investment stake in that Because, in the private equity arena, value is generally business, one would not merely take the relevant share of crystallised through a sale or flotation of the entire the business’s value, since that would fail to recognise the Underlying Business, rather than through a transfer of uncertainty and risk involved in actually selling the business individual shareholder stakes, the value of the business as a and crystallising the Investment value, and particularly the whole at the reporting date will often provide a key insight risk that value may be eroded before a sale can be achieved into the value of investment stakes in that business. For this under the current market conditions. reason, a number of the methodologies described below involve estimating the Enterprise Value as an initial step. The estimation of Fair Value should be undertaken on the assumption that options and warrants are exercised, where There will be some situations where the Fund has little the Fair Value is in excess of the exercise price. The exercise ability to influence the timing of a Realisation and a price of these may result in surplus cash arising in the Realisation is not likely in the foreseeable future, perhaps Underlying Business if the exercise price is significant. because the majority shareholders are strongly opposed to it. In these circumstances (which are expected to be rare in Other rights such as conversion options and ratchets, which private equity), Fair Value will derive mainly from the may impact the Fair Value of the Fund’s Investment, should expected cash flows and risk of the relevant financial be reviewed on a regular basis to assess whether these are instruments rather than from the Enterprise Value. likely to be exercised and the extent of any impact on value The valuation methodology used in these circumstances of the Fund’s Investment. should therefore reflect this fact. S EC T I O N I: D E T E R M I N I N G F A I R V A LU E Differential allocation of proceeds may have an impact on it is also important to consider the stage of development the value of an Investment. If liquidation preferences exist, of an enterprise and/or its ability to generate maintainable these need to be reviewed to assess whether they will give profits or positive cashflow. rise to a benefit to the Fund, or a benefit to a third party to The Valuer will select the valuation methodology that is the detriment of the Fund. the most appropriate and consequently make valuation Further examples of specific matters for consideration that adjustments on the basis of their informed and experienced may impact valuations are set out in section II, 3 . judgment. This will include consideration of factors such as: Movements in rates of exchange may impact the value of • the relative applicability of the methodologies used given the Fund’s Investments and these should be taken in the nature of the industry and current market conditions; account. • the quality, and reliability of the data used in each Where the reporting currency of the Fund is different methodology; from the currency in which the Investment is denominated, • the comparability of enterprise or transaction data; translation into the reporting currency for reporting purposes should be done using the bid spot exchange rate • the stage of development of the enterprise; and prevailing at the reporting date. • any additional considerations unique to the subject enterprise. 3.2 Selecting the Appropriate Methodology Where the Valuer considers that several methodologies are The Valuer should exercise her or his judgement to select appropriate to value a specific Investment, the Valuer may the valuation methodology that is the most appropriate consider the outcome of these different valuation for a particular Investment. methodologies so that the results of one particular method may be used as a cross-check of values or to corroborate or The key criterion in selecting a methodology is that it otherwise be used in conjunction with one or more other should be appropriate in light of the nature, facts and methodologies in order to determine the Fair Value of the circumstances of the Investment and its materiality in Investment. the context of the total Investment portfolio. Methodologies should be applied consistently from An appropriate methodology will incorporate available period to period, except where a change would result information about all factors that are likely materially to in better estimates of Fair Value. affect the Fair Value of the Investment. In this context, 13 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 14 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) This may occur for example in the case of a company 3.3 Price of Recent Investment becoming profitable and cash flow becoming positive on a Where the Investment being valued was itself made maintainable basis a few years after the start-up phase. recently, its cost will generally provide a good indication of Any changes in valuation methodologies should be clearly Fair Value. Where there has been any recent Investment in stated. It is expected that there would not be frequent the Investee Company, the price of that Investment will changes in valuation methodologies. provide a basis of the valuation. The table below identifies a number of the most widely used The validity of a valuation obtained in this way is inevitably methodologies. In assessing whether a methodology is eroded over time, since the price at which an Investment was appropriate, the Valuer should be predisposed towards made reflects the effects of conditions that existed when the those methodologies that are generally accepted and those transaction took place. In a dynamic environment, changes in that draw on market-based measures of risk and return, market conditions, the passage of time itself and other factors since both these qualities would serve to enhance the will act to diminish the appropriateness of this methodology reliability of the Fair Value estimates. as a means of estimating value at subsequent dates. Methodologies utilising discounted cashflows and industry In addition, where the price at which a third party has benchmarks should rarely be used in isolation of the invested is being considered as the basis of valuation, the market-based measures and then only with extreme caution. background to the transaction must be taken in to account. These methodologies may be useful as a cross-check of In particular, the following factors may indicate that the price values estimated using the market-based methodologies. was not wholly representative of the Fair Value at the time: METHODOLOGY • a further Investment by the existing stakeholders with little new Investment; Price of Recent Investment Earnings multiple • different rights attach to the new and existing Investments; Net assets • a new investor motivated by strategic considerations; Discounted cash flows or earnings (of Underlying Business) • the Investment may be considered to be a forced sale or Discounted cash flows (from the Investment) ‘rescue package’; or Industry valuation benchmarks • the absolute amount of the new Investment is relatively insignificant. S EC T I O N I: D E T E R M I N I N G F A I R V A LU E This methodology is likely to be appropriate for all private service financial instruments, breaches of covenants equity Investments, but only for a limited period after the and a deterioration in the level of budgeted or forecast date of the relevant transaction. Because of the frequency performance; with which funding rounds are often undertaken for seed • there has been a significant adverse change either in and start-up situations, or in respect of businesses engaged the company’s business or in the technological, market, in technological or scientific innovation and discovery, the economic, legal or regulatory environment in which the methodology will often be appropriate for valuing business operates; Investments in such circumstances. • market conditions have deteriorated. This may be indicated The length of period for which it would remain appropriate to by a fall in the share prices of quoted businesses operating use this methodology for a particular Investment will depend in the same or related sectors; or on the specific circumstances of the case, but a period of one year is often applied in practice. • the Underlying Business is raising money and there is evidence that the financing will be made under significantly In applying the Price of Recent Investment methodology, different terms and conditions from the original Investment. the Valuer should use the cost of the Investment itself or the price at which a significant amount of new Investment into the company was made to estimate the Fair Value of 3.4 Earnings Multiple the Investment, but only for a limited period following This methodology involves the application of an earnings the date of the relevant transaction. During the limited multiple to the earnings of the business being valued in period following the date of the relevant transaction, the order to derive a value for the business. Valuer should in any case assess whether changes or events subsequent to the relevant transaction would This methodology is likely to be appropriate for an imply a change in the Investment’s Fair Value. Investment in an established business with an identifiable stream of continuing earnings that can be considered to be For example, a reduction in the Investment’s Fair Value maintainable. may have occurred for a number of reasons, including the following: This methodology may be applicable to companies with negative earnings, if the losses are considered to be • the performance and/or prospects of the Underlying temporary and one can identify a level of “normalised” Business are significantly below the expectations on which maintainable earnings. the Investment was based. Prima facie indicators of this include a failure to meet significant milestones or to 15 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 16 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) This may involve the use of averaging of earnings figures Guidance on the interpretation of underlined terms is given for a number of periods, using a forecast level of earnings below. or applying a “sustainable” profit margin to current or forecast revenues. Appropriate Multiple In using the Earnings Multiple methodology to estimate A number of earnings multiples are commonly used, the Fair Value of an Investment, the Valuer should: including price/earnings (P/E), Enterprise Value/earnings before interest and tax (EV/EBIT) and depreciation and i. apply a multiple that is appropriate and reasonable amortisation (EV/EBITDA). The particular multiple used (given the risk profile and earnings growth prospects should be appropriate for the business being valued. of the underlying company) to the maintainable (N.B: The multiples of revenues and their use are presented earnings of the company; in 3.8. Industry Valuation Benchmarks) ii. adjust the amount derived in (i) above for surplus In general, because of the key role of financial structuring assets or excess liabilities and other relevant factors in private equity, multiples should be used to derive an to derive an Enterprise Value for the company; Enterprise Value for the Underlying Business. Therefore, iii. deduct from the Enterprise Value all amounts relating where a P/E multiple is used, it should generally be applied to financial instruments ranking ahead of the highest to a taxed EBIT figure (after deducting finance costs ranking instrument of the Fund in a liquidation and relating to working capital or to assets acquired or leased taking into account the effect of any instrument that using asset finance) rather than to actual after-tax profits, may dilute the Fund’s Investment in order to derive since the latter figure will generally have been significantly the Gross Attributable Enterprise Value; reduced by finance costs. iv. apply an appropriate Marketability Discount to the By definition, earnings multiples have as their numerator Gross Attributable Enterprise Value derived in (iii) a value and as their denominator an earnings figure. above in order to derive the Net Attributable The denominator can be the earnings figure for any Enterprise Value; and specified period of time and multiples are often defined as “historical”, “current” or “forecast” to indicate the earnings v. apportion the Net Attributable Enterprise Value used. It is important that the multiple used correlates to the appropriately between the relevant financial period and concept of earnings of the company being valued. instruments. S EC T I O N I: D E T E R M I N I N G F A I R V A LU E Reasonable Multiple costs associated with them which should be reflected in the value attributed to the business in question. The Valuer would usually derive a multiple by reference to market-based multiples, reflected in the market valuations It is important that the earnings multiple of each comparator of quoted companies or the price at which companies have is adjusted for points of difference between the comparator changed ownership. This market-based approach presumes and the company being valued. These points of difference that the comparator companies are correctly valued by should be considered and assessed by reference to the two the market. Whilst there is an argument that the market key variables of risk and earnings growth prospects which capitalisation of a quoted company reflects not the value of underpin the earnings multiple. In assessing the risk profile the company but merely the price at which “small parcels” of the company being valued, the Valuer should recognise of shares are exchanged, the presumption in these that risk arises from a range of aspects, including the nature Guidelines is that market based multiples do correctly of the company’s operations, the markets in which it operates reflect the value of the company as a whole. and its competitive position in those markets, the quality of its management and employees and, importantly in the case of Where market-based multiples are used, the aim is to private equity, its capital structure and the ability of the Fund identify companies that are similar, in terms of risk attributes holding the Investment to effect change in the company. and earnings growth prospects, to the company being valued. For example, the value of the company may be reduced if it: This is more likely to be the case where the companies are similar in terms of business activities, markets served, size, • is smaller and less diverse than the comparator(s) and, geography and applicable tax rate. therefore, less able generally to withstand adverse economic conditions; In using P/E multiples, the Valuer should note that the P/E ratios of comparator companies will be affected by • is reliant on a small number of key employees; the level of financial gearing and applicable tax rate of • is dependent on one product or one customer; those companies. • has high gearing; or In using EV/EBITDA multiples, the Valuer should note that such multiples, by definition, remove the impact on • for any other reason has poor quality earnings. value of depreciation of fixed assets and amortisation of goodwill and other intangibles. If such multiples are used without sufficient care, the Valuer may fail to recognise that business decisions to spend heavily on fixed assets or to grow by acquisition rather than organically do have real 17 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 18 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) Recent transactions involving the sale of similar companies Maintainable Earnings are sometimes used as a frame of reference in seeking to In applying a multiple to maintainable earnings, it is derive a reasonable multiple. It is sometimes argued, since important that the Valuer is satisfied that the earnings figure such transactions involve the transfer of whole companies can be relied upon. Whilst this might tend to favour the use whereas quoted multiples relate to the price for “small of audited historical figures rather than unaudited or parcels” of shares, that they provide a more relevant source forecast figures, it should be recognised that value is by of multiples. However, their appropriateness in this respect definition a forward-looking concept, and quoted markets is often undermined by the following: more often think of value in terms of “current” and “forecast” • the lack of forward-looking financial data and other multiples, rather than “historical” ones. In addition, there is information to allow points of difference to be identified the argument that the valuation should, in a dynamic and adjusted for; environment, reflect the most recent available information. There is therefore a trade-off between the reliability and • the generally lower reliability and transparency of relevance of the earnings figures available to the Valuer. reported earnings figures of private companies; and On balance, whilst it remains a matter of judgment for the • the lack of reliable pricing information for the transaction Valuer, he should be predisposed towards using historical itself. (though not necessarily audited) earnings figures or, if he believes them to be reliable, forecast earnings figures for It is a matter of judgment for the Valuer as to whether, the current year. in deriving a reasonable multiple, he refers to a single comparator company or a number of companies or Whichever period’s earnings are used, the Valuer should the earnings multiple of a quoted stock market sector or satisfy himself that they represent a reasonable estimate of sub-sector. It may be acceptable, in particular circumstances, maintainable earnings, which implies the need to adjust for for the Valuer to conclude that the use of quoted sector or exceptional or non-recurring items, the impact of sub-sector multiples or an average of multiples from a discontinued activities and acquisitions and forecast “basket” of comparator companies may be used without downturns in profits. adjusting for points of difference between the comparator(s) and the company being valued. S EC T I O N I: D E T E R M I N I N G F A I R V A LU E Appropriate Marketability Discount In assessing the influence of the Fund over the timing of Realisation, nature of Realisation and Realisation process, The notion of a Marketability Discount relates to an some of the factors the Valuer should consider are as follows: Investment rather than to the Underlying Business. Paragraph (iv) above therefore requires the discount to • are there other like-minded shareholders with regard to be considered and applied at the level at which the Fund Realisation and what is the combined degree of influence? begins to participate in the Enterprise Value. • is there an agreed exit strategy or exit plan? Marketability will vary from situation to situation and is a • do legal rights exist which allow the Fund together with question of judgment. It should be noted that the Fair Value like-minded shareholders to require the other shareholders concept requires that the Marketability Discount is to be to agree to and enable a proposed Realisation to proceed? determined not from the perspective of the current holder of the Investment, but from the perspective of Market Participants. • does the management team of the Underlying Business have the ability in practice to reduce the prospects of a Some of the factors the Valuer should consider in this successful Realisation? This may be the case where the respect are as follows: team is perceived by possible buyers to be critical to the • the closer and more certain is a Realisation event for ongoing success of the business. If this is the case, what is the Investment in question, the lower would be the the attitude of the management team to Realisation? Marketability Discount; The Valuer might consider that under specific circumstances • the greater the influence of the Fund over the timing of the Marketability Discount is not appropriate and should Realisation, nature of Realisation and Realisation process, not be applied. When a discount is applied, the Valuer the lower would be the Marketability Discount; should consider all the relevant factors in determining the appropriate Marketability Discount in each particular • if the underlying company were not considered saleable situation. A discount in the range of 10% to 30% (in steps or floatable at the reporting date, the questions arise of of 5%) is generally used in practice, depending upon the what has to be done to make it saleable or floatable, how particular circumstances. difficult and risky that course of action is to implement and how long it is expected to take; and • the impact of stock market conditions and mergers and acquisitions activity levels on the ability to achieve a flotation or sale of the Underlying Business. 19 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 20 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) By way of illustration: Apportion the Net Attributable Enterprise Value appropriately • Where the Fund (together with like-minded shareholders with regard to Realisation) has legal rights and the ability The apportionment should reflect the respective amounts in practice to initiate a Realisation process and require accruing to each financial instrument holder in the event other shareholders to co-operate, or there is in place an of a sale at that level at the reporting date. Where there agreed Realisation strategy, a discount rate of 10% may are ratchets or share options or other mechanisms (such as be appropriate. “liquidation preferences”, in the case of Investments in early- stage businesses) in place which would be triggered in the • Where the Fund (together with like-minded shareholders event of a sale of the company at the given Enterprise Value with regard to Realisation) does not have such a degree of at that date, these should be reflected in the apportionment. influence over Realisation, possibly by virtue of holding a minority of the equity, but the other shareholders are not Where, in respect of financial instruments other than equity strongly opposed to a Realisation, a discount rate of 30% instruments, the apportionment results in a shortfall when may be appropriate (NB. where a Realisation event is not compared with the amounts accruing up to the reporting foreseeable at all, perhaps because the Fund holds a date under their contractual terms, the Valuer should minority equity stake and the majority shareholders are consider whether, in estimating Fair Value, the shortfall should totally opposed to a Realisation, methodologies which be applied and, if so, to what extent. If the circumstances involve an assessment of the value of the business as a are such that it is reasonably certain, taking account of whole may not be appropriate). the risks attaching, that the Fund will be able to collect all amounts due according to the relevant contractual terms, • Where the Fund (together with like-minded shareholders then the shortfall should not be applied. with regard to Realisation) does not have the ability to require other shareholders to co-operate regarding Realisation, but there is regular discussion about 3.5 Net Assets Realisation prospects and timing by the board and/or This methodology involves deriving the value of a business shareholders, a discount rate of 20% may be appropriate. by reference to the value of its net assets. This methodology is likely to be appropriate for a business whose value derives mainly from the underlying value of its assets rather than its earnings, such as property holding companies and investment businesses. S EC T I O N I: D E T E R M I N I N G F A I R V A LU E This methodology may also be appropriate for a business that 3.6 Discounted Cash Flows or Earnings is not making an adequate return on assets and for which a (of Underlying Business) greater value can be realised by liquidating the business and This methodology involves deriving the value of a business selling its assets. In the context of private equity, it may by calculating the present value of expected future cash therefore be appropriate, in certain circumstances, for flows (or the present value of expected future earnings, as a valuing Investments in loss-making companies and surrogate for expected future cash flows). The cash flows companies making only marginal levels of profits. and “terminal value” are those of the Underlying Business, In using the Net Assets methodology to estimate the Fair not those from the Investment itself. Value of an Investment, the Valuer should: The Discounted Cash Flows (DCF) technique is flexible in i. derive an Enterprise Value for the company using the sense that it can be applied to any stream of cash flows appropriate measures to value its assets and liabilities (or earnings). In the context of private equity valuation, this (including, if appropriate, contingent assets and flexibility enables the methodology to be applied in situations liabilities); that other methodologies may be incapable of addressing. While this methodology may be applied to businesses ii. deduct from the Enterprise Value all amounts relating going through a period of great change, such as a rescue to financial instruments ranking ahead of the highest refinancing, turnaround, strategic repositioning, loss making ranking instrument of the Fund in a liquidation in order or is in its start-up phase, there is a significant risk is to derive the Gross Attributable Enterprise Value; utilising this methodology. iii. apply an appropriate Marketability Discount to The disadvantages of the DCF methodology centre around the Gross Attributable Enterprise Value to derive its requirement for detailed cash flow forecasts and the need to the Net Attributable Enterprise Value; and estimate the “terminal value” and an appropriate risk-adjusted iv. apportion the Net Attributable Enterprise Value discount rate. All of these inputs require substantial subjective appropriately between the relevant financial judgments to be made, and the derived present value instruments. amount is often sensitive to small changes in these inputs. Guidance on the interpretation of underlined terms is given Due to the high level of subjectivity in selecting inputs for this in the “Earnings multiple” section above. technique, DCF based valuations are useful as a cross-check of values estimated under market-based methodologies and should only be used in isolation of other methodologies under extreme caution. 21 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 22 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) In assessing the appropriateness of this methodology, 3.7 Discounted Cash Flows (from the Investment) the Valuer should consider whether its disadvantages This methodology applies the DCF concept and technique and sensitivities are such, in the particular circumstances, to the expected cash flows from the Investment itself. as to render the resulting Fair Value insufficiently reliable. Where Realisation of an Investment or a flotation of the In using the Discounted Cash Flows or Earnings Underlying Business is imminent and the pricing of the (of Underlying Business) methodology to estimate relevant transaction has been substantially agreed, the the Fair Value of an Investment, the Valuer should: Discounted Cash Flows (from the Investment) methodology i. derive the Enterprise Value of the company, using (or, as a surrogate, the use of a simple discount to the expected reasonable assumptions and estimations of expected Realisation proceeds or flotation value) is likely to be the future cash flows (or expected future earnings) and most appropriate methodology. the terminal value, and discounting to the present This methodology, because of its flexibility, is capable of by applying the appropriate risk-adjusted rate that being applied to all private equity Investment situations. quantifies the risk inherent in the company; It is particularly suitable for valuing non-equity Investments ii. deduct from the Enterprise Value all amounts relating in instruments such as debt or mezzanine debt, since the to financial instruments ranking ahead of the highest value of such instruments derives mainly from instrument- ranking instrument of the Fund in a liquidation in order specific cash flows and risks rather than from the value of to derive the Gross Attributable Enterprise Value; the Underlying Business as a whole. iii. apply an appropriate Marketability Discount to Because of its inherent reliance on substantial subjective the Gross Attributable Enterprise Value derived judgments, the Valuer should be extremely cautious of using in ii above in order to derive the Net Attributable this methodology as the main basis of estimating Fair Value Enterprise Value; and for Investments which include an equity element. The methodology will often be useful as a sense-check iv. apportion the Net Attributable Enterprise Value of values produced using other methodologies. appropriately between the relevant financial instruments. Private equity risk and the rates of return necessary to compensate for different risk levels are central commercial Guidance on the interpretation of underlined terms is given variables in the making of all private equity Investments. in the “Earnings multiple” section above. Accordingly there exists a frame of reference against which to make discount rate assumptions. S EC T I O N I: D E T E R M I N I N G F A I R V A LU E However the need to make detailed cash flow forecasts over 3.8 Industry Valuation Benchmarks the Investment life may reduce the reliability and crucially A number of industries have industry-specific valuation for equity Investments, there remains a need to estimate the benchmarks, such as “price per bed” (for nursing-home “terminal value”. operators) and “price per subscriber” (for cable television Where the Investment comprises equity or a combination companies). Other industries, including certain financial of equity and other financial instruments, the terminal value services and information technology sectors and some would usually be derived from the anticipated value of services sectors where long-term contracts are a key feature, the Underlying Business at Realisation. This will usually use multiples of revenues as a valuation benchmark. necessitate making assumptions about future business These industry norms are often based on the assumption performance and developments and stock market and other that investors are willing to pay for turnover or market valuation ratios at the assumed Realisation date. In the case share, and that the normal profitability of businesses in of equity Investments, small changes in these assumptions can the industry does not vary much. materially impact the valuation. In the case of non-equity The use of such industry benchmarks is only likely to instruments, the terminal value will usually be a pre-defined be reliable and therefore appropriate as the main basis amount, which greatly enhances the reliability of the valuation. of estimating Fair Value in limited situations, and is more In circumstances where a Realisation is not foreseeable, likely to be useful as a sense-check of values produced the terminal value may be based upon assumptions of the using other methodologies. perpetuity cash flows accruing to the holder of the Investment. These circumstances (which are expected to be rare in 3.9 Available Market Prices private equity) may arise where the Fund has little ability to influence the timing of a Realisation and/or those shareholders Private Equity Funds may be holding Quoted Instruments, that can influence the timing do not seek a Realisation. for which there is an available market price. In using the Discounted Cash Flows (from the Investment) Instruments quoted on a stock market should be valued methodology to estimate the Fair Value of an Investment, at their bid prices on the Reporting Date. the Valuer should derive the present value of the For certain Quoted Instruments there is only one market Investment, using reasonable assumptions and estimations price quoted, representing, for example, the value at which of expected future cash flows and the terminal value the most recent trade in the instrument was transacted. and date, and the appropriate risk-adjusted rate that quantifies the risk inherent to the Investment. 23 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 24 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) For other Quoted Instruments there are two market prices If compliance with specific accounting principles that at any one time: the lower “bid” price quoted by a market discourage the use of a discount under specific circumstances maker, which he will pay an investor for a holding (i.e. the is sought, the Valuer should not apply a discount to the investor’s disposal price), and the higher “offer” price, which market price. an investor can expect to pay to acquire a holding. A third Outside of accounting principles compliance, the Valuer price basis for valuation purposes, as an alternative to either should consider whether factors exist which inhibit the bid or offer, is the mid-market price (i.e. the average of the Realisation of the asset and that it would be appropriate bid and offer prices). Where a bid and offer price exists, the to apply a discount to the market price. bid price should be used, although the use of the mid-market price will not usually result in a material overstatement Factors which indicate that the valuation based on of value. the available market price should be reduced by a Marketability Discount would include situations where: This methodology should apply when the bid prices are set on an active market. An instrument is regarded as quoted i. there is a formal restriction on trading in the relevant on an active market if quoted prices are readily and securities; or regularly available from an exchange, broker, dealer, ii. there is a risk that the holding may not be able to be industry group, pricing services or regulatory agency, and sold immediately. those prices represent actual and regularly occurring market transaction on arm’s length basis. In determining the level of Marketability Discount to apply, the method generally used in practice is for the Valuer to The Valuer should consider whether any legal or other consider the length of the period over which trading regulations apply to the context in which the valuation will be restrictions apply, or the size of the holding in relation to used. International Financial Reporting Standards (‘IFRS’) normal trading volumes in that security. In this context, presume that the available price for a security may be applied the following levels of discount are generally used: to a holding of any size. Accordingly to remain compliant with IFRS, Marketability Discounts should generally not be NUMBER OF DAYS TRADING VOLUME DISCOUNTS % applied to prices quoted on an active market. If compliance Up to 20 0 with accounting principles that discourage the use of a discount under specific circumstances is not sought, the 20 to 49 10 Valuer can elect to apply a discount to the market price. 50 to 100 20 100+ 25 S EC T I O N I: D E T E R M I N I N G F A I R V A LU E Occasionally, it may be inappropriate to consider Marketability Whilst it is a matter of judgment for the Valuer, where a by reference to trading volumes. For example, in the case of holding is, at the reporting date, both subject to a formal a particular security, a number of parties may have little restriction on trading and also significant in relation to interest in buying on the market, because of the “small” normal trading volumes in that security, the discount quantities available, but may be interested in buying more applied to the holding should be the higher of the two that substantial stakes off-market. In this situation, the estimated would be considered appropriate in each of the price and size of such off-market transactions should be circumstances in isolation. taken account of in considering Marketability. By way of If a different level of discount is appropriate in light of the further example, where the quoted entity has a stated particular circumstances of an Investment, the Valuer should intention of seeking a buyer and there is a reasonable use that rate and should disclose the fact that he has done so expectation of a sale of the entity in the six months following together with the rationale for so doing. the reporting date at a price representing a bid premium, it may be appropriate in the particular circumstances for the Valuer to conclude that the positive bid premium effect offsets the negative trading volume effect, such that the undiscounted market price is on balance a reasonable estimate of Fair Value. In determining the level of Marketability Discount to apply under paragraph (iv) above, the Valuer should consider the extent of compensation a holder would require when comparing the Investment in question with an identical but unrestricted holding. In the case of a six-month lock-up period, in practice a discount of 20% to the market price is often used at the beginning of the period, reducing to zero at the end of the period. 25 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 26 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) S EC T I O N II: A P P L I C AT I O N G U I DA N C E INTRODUCTION Set out below are the most commonly used valuation methodologies based on the ability of the Underlying Business to Section I sets out the guidelines and principles which generate revenues and profits. The Valuer would be expected to represent best practice for the valuation of private equity and use these methodologies unless there is compelling evidence that venture capital Investments. This section sets out further another methodology would provide a more reliable Fair Value. practical guidance to the application of those principles and Methodologies should be applied consistently from one methodologies to specific cases. reporting period to the next, unless there is a change in circumstances of the enterprise, for example the enterprise generating sustainable profits. 1 S E L EC T I N G THE A P P R O P R I AT E M ET H O D O LO GY Early stage enterprises or enterprises without or with insignificant revenues, and without either profits or In estimating Fair Value for an Investment, the Valuer should positive cash flows apply a methodology that is appropriate in light of the nature, For these enterprises, typically in a seed, start-up or an facts and circumstances of the Investment and should use early-stage situation, there are usually no current and no reasonable assumptions and estimates. short-term future earnings or positive cash flows. It is difficult When selecting the appropriate methodology each Investment to gauge the probability and financial impact of the success should be considered individually. Where an immaterial group or failure of development or research activities and to make of Investments in a portfolio are similar in terms of risk profile reliable cash flow forecasts. and industry, it is acceptable to apply the same methodology Consequently, the most appropriate approach to determine across all Investments in that immaterial group. The methodology Fair Value is a methodology that is based on market data, applied should be the same as that used for material that being the Price of a Recent Investment. investments with a similar risk profile in that industry. This methodology is likely to be appropriate for a limited When selecting the appropriate methodology, it is important period after the date of the relevant transaction. to consider the stage of development of an enterprise and/or its ability to produce maintainable profits or maintainable The length of period for which it would remain appropriate to positive cash. use this methodology for a particular Investment will depend on the specific circumstances of the case, but a period of one year is often applied in practice. 27 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 28 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) After the appropriate limited period, the Valuer should In the event that the enterprise is generating a return on its consider whether either the circumstances of the Investment net assets below expectations and that greater value may be have changed, such that one of the other methodologies realised by the sale of the assets, a valuation based on the net would be more appropriate, whether there is any evidence assets methodology may be appropriate. of deterioration or strong defensible evidence of an increase in Other methodologies such as the earnings multiple are value. In the absence of these indicators the Valuer will typically generally inappropriate. The DCF methodologies may be revert to the value reported at the previous reporting date. utilised, however the disadvantages inherent in these, arising In the absence of significant revenues, profits or positive cash from the high levels of subjective judgement, may render the flows, other methodologies such as the earnings multiple are methodology inappropriate. generally inappropriate. The DCF methodologies may be utilised, however the disadvantages inherent in these, arising Enterprises with revenues, maintainable profits and/or from the high levels of subjective judgement, may render the maintainable positive cash flows methodology inappropriate. For some period of time after the initial Investment, the Price of Recent Investment methodology, is likely to be the most Enterprises with revenues, but without either significant appropriate indication of Fair Value. profits or significant positive cash flows This period of time will depend on the specific circumstances of For these enterprises it is often difficult to gauge the the case, but should not generally exceed a period of one year. probability and financial impact of the success of development activities or to make reliable future earnings or cash flow Thereafter is it likely to be most appropriate to estimate forecasts. This is seen typically in early stage enterprises, Fair Value by reference to the quoted market and to use development, turnaround or recovery situations. the Earnings Multiple methodology. The most appropriate methodology is expected to be the price of a recent investment. The continuing validity of this basis as a reflection of Fair Value needs to be considered and as a part of this consideration, industry benchmarks may provide appropriate support. S EC T I O N II: A P P L I C AT I O N G U I DA N C E 2 S P EC I F I C C O N S I D E R AT I O N S funds from investors at a higher valuation, the purpose of the down round may be, among others, the dilution of 2.1 Internal Funding Rounds the founders or the dilution of investors not participating in the round of financing. The price at which a funding round takes place is a clear indicator of Fair Value at that date. When using the Price Similarly when a financing is made at a higher valuation of Recent Investment methodology, the Valuer should (internal up round), in the absence of new investors or considered whether there are specific circumstances other significant factors which indicate that value has been surrounding that round of Investment which may reduce enhanced, the transaction alone is unlikely to be a reliable the reliability of the price as an indicator of Fair Value. indicator of Fair Value. A round of financing that involves only existing investors of the Underlying Business in the same proportion to their 2.2 Bridge Financing existing Investments (internal round), is unlikely to be an Funds, or related vehicles, may grant loans to an Underlying appropriate basis for a change in valuation as the Business pending a new round of financing (Bridge loans). transaction may not have been undertaken at arm’s length. This may be provided in anticipation of an initial Investment Nevertheless, a financing with existing investors that is by the Fund, or ahead or a proposed follow on Investment. priced at a valuation that is lower than the valuation In the case of an initial Investment, where the Fund holds reported at the previous Reporting Date (internal down no other investments in the Underlying Business, the Bridge round) may indicate a decrease in value and should loan should be valued in isolation. In these situations and if therefore be taken into consideration. it is expected that the financing will occur in due course and Internal down rounds may take various forms, including that the Bridge loan is merely ensuring that funds are made a corporate reorganisation, i.e. a significant change in the available early, the Valuer should value these loans at cost. equity base of a company such as converting all outstanding If it is anticipated that the company may have difficulty shares into equity, combining outstanding shares into a arranging the financing, and that its viability is in doubt, smaller number of shares (share consolidation) or even the Valuer should consider making a provision against the cancelling all outstanding shares before a capital increase. cost of that loan. The objectives of the existing investors in making an internal down round may vary. Although a down round evidences the fact that the company was unable to raise 29 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 30 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) If the bridge finance is provided to an existing Investment and that the warrant holder will be unable to significantly in anticipation of a follow on Investment, the bridge finance influence the Realisation process. In these situations, a large should be included, together with the original Investment, Marketability Discount will be appropriate. as a part of the overall package of investment being valued. In the event that the Mezzanine loan is one of a number of instruments held by the Fund in the Underlying Business, 2.3 Mezzanine Loans then the Mezzanine loan and any attached warrants should be included as a part of the overall package of investment Mezzanine loans are one of the commonly used sources being valued. of debt finance for Investments. Typically these will rank below the senior debt, but above shareholder loans or equity, bear an interest rate appropriate to the level of risk 2.4 Rolled up Loan Interest being assumed by the loan provider and may have additional Many financial instruments commonly used in private equity potentially value enhancing aspects such as warrants. Investments accumulate interest which is only realised in Often these are provided by a party other than the equity cash on redemption of the instrument (e.g. deep discount provider and as such may be the only instrument held by debentures or Payment-in-Kind Notes). the Fund in the Underlying Business. In these situations, the Mezzanine loan should be valued on a stand alone basis. In valuing these instruments, the Valuer should assess the The price at which the Mezzanine loan was granted is a expected amount to be recovered from these instruments. reliable indicator of Fair Value at that date. The Valuer If deterioration indicators exist, a provision against the cost should consider whether any indications of deterioration of the loan should be made to reflect the deterioration in in the value of the Underlying Business exist, which suggest value. The consideration of recoverable amount will also that the loan will not be fully recovered. In the event of include the existence of any reasonably anticipated deterioration, this should be reflected in the Fair Value enhancements such as interest rate step increases. of the Mezzanine loan. The difference between the estimated recoverable amount (if in excess of the original cost) should be spread over Warrants attached to Mezzanine loans should be the anticipated life of the note so as to give a constant rate considered separately from the loan. The Valuer should of return on the instrument. select a methodology appropriate to valuing the Underlying Business and apply the percentage ownership that the exercised warrants will confer to that valuation. It is expect that in most cases, the percentage ownership will be small S EC T I O N II: A P P L I C AT I O N G U I DA N C E 2.5 Indicative Offers 3 EVENTS TO CO N S I D E R FOR THEIR I M PAC T Indicative offers received from a third party for the ON V A LU E Underlying Business may provide a good indication of When performing the valuation, at each Reporting Date, Fair Value. This will apply to offers for a part or the whole the Valuer should consider all factors that will contribute to a Underlying Business as well as other situations such as material creation or diminution in value of the Investment. price indications for debt or equity refinancing. In the absence of reliable value indicators, such as recent However, before using the offer as evidence of Fair Value, Investments or the generation of profits, there are many subtle the Valuer should consider the motivation of the party in factors which should be considered by the Valuer as these may making the offer. Indicative offers may be made deliberately indicate a material change in value. high for such reasons as; to open negotiations; gain access to the company or made subject to stringent conditions or Examples of events or changes in circumstances which may future events. Similarly they may be deliberately low if the indicate that a decrease or an increase in value has occurred offeror believes that the vendor may be in a forced sale include, but are not limited to: position, or to take an opportunity to increase their equity • the performance or prospects of the Underlying Business stake at the expense of other less liquid stakeholders. being significantly below or above the expectations on In addition indicative offers may be made on the basis of which the Investment was based insufficient detailed information to be properly valid. • the Underlying Business is performing substantially and These motivations should be considered by the Valuer, consistently behind or ahead of plan however it is unlikely that a firm conclusion can be drawn. • the Underlying Business met or missed its milestones such Accordingly, typically indicative offers will provide useful as clinical trials, technical developments, divisions becoming additional support for a valuation estimated by one of the cash positive, restructurings being completed valuation methodologies, but are insufficiently robust to be used in isolation. • there is a deterioration or improvement in the level of budgeted performance • whether the Underlying Business has breached any banking covenants, defaulted on any obligations 31 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 32 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) • the existence of off-balance sheet items, contingent liabilities Where deterioration in value has occurred, the Valuer should and guarantees reduce the carrying value of the Investment reported at the previous Reporting Date to reflect the estimated decrease. • the existence of a major lawsuit If there is insufficient information to accurately assess the • disputes over commercial matters such as intellectual adjusted Fair Value, decreases in value are usually in practice property rights assessed in tranches of 25%. If however the Valuer believes • the existence of fraud within the company that they have sufficient information to more accurately assess fair value (this may occur when 25% or less or the original • a change of management or strategic direction of the value remains), then smaller tranches of 5% may be applied. Underlying Business If there is evidence of value creation, such as those listed • whether there has been a significant adverse or favourable above, the Valuer may consider increasing the carrying value change either in the company’s business or in the of the Investment. Caution must be applied so that positive technological, market, economic, legal or regulatory developments are not being valued before they actually environment in which the business operates; contribute to an increase in value of the Underlying Business. • significant changes in market conditions. This may be In practice, in the absence of additional financing rounds or indicated by a movement in the share prices of quoted profit generation, these more subtle indicators of value businesses operating in the same or related sectors; enhancement are generally only used to support the reversal of a previously recognised deterioration in value. • the Underlying Business is raising money and there is evidence that the financing will be made under conditions different from those prevailing at the time of the previous round of financing. The Valuer will assess the impact of all positive and negative events and adjust the carrying value accordingly in order to reflect the Fair Value of the Investment at the Reporting Date. S EC T I O N II: A P P L I C AT I O N G U I DA N C E 4 I M PAC T S FROM STRUCTURING In assessing whether rights are likely to be taken up by stakeholders, the Valuer should limit their consideration to a Frequently the structuring of a private equity Investment is comparison of the value received by the exerciser against the complex with groups of stakeholders holding different rights cost of exercising. If the exerciser will receive an enhancement which either enhance or diminish the value of their interests, in value by exercising, the Valuer should assume that they depending on the success or otherwise of the Underlying will do so. Business. The estimation of Fair Value should be undertaken on the basis Valuations must take account the impact of future changes in that all rights that are currently exercisable and are likely to be the structure of the Investment which may materially impact exercised (such as options), or those that occur automatically the Fair Value. These potential impacts may take several on certain events taking place (such as liquidation preferences different legal forms and may be initiated at the Fund’s option, on Realisation, or ratchets based on value), have taken place. automatically on certain events taking place, or at the option Consideration should be given to whether the exercise price of another investor. Common clauses include, but are not will result in surplus cash arising in the Investee Company. limited to: • Stock options and warrants • Anti-dilution clauses • Ratchet clauses • Convertible debt instruments • Liquidation preferences • Commitments to take up follow-on capital Investments; These rights should be reviewed on a regular basis to assess whether these are likely to be exercised and the extent of any impact on value of the Fund’s Investment. At each Reporting Date, the Valuer should determine whether these rights are likely to be exercised. 33 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 34 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) W O R KG R O U P W O R KG R O U P • Marie-Fleur Bonte, Manager, PricewaterhouseCoopers • Angela Crawford-Ingle, Partner, PricewaterhouseCoopers • Herman Daems, Chairman, GIMV • Jean-Yves Demeunynk, Managing Director, AFIC • Javier Echarri, Secretary General, EVCA • Pierre Esmein, Partner, Deloitte & Touche • Ann Glover, CEO, Amadeus Capital • Richard Green, Managing Director, Kleinwort Capital Limited • Didier Guennoc, Chief Economist, EVCA • John Mackie, Chief Executive, BVCA • Sylvain Quagliaroli, Partner, Grant Thornton • Monique Saulnier, Managing Partner, Sofinnova Partners • Jean-Bernard Schmidt, Chairman, Sofinnova Partners • Writer: Anthony Cecil, Partner, KPMG 35 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 36 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) AFIC AIFI APCRI (The Association Française (The Italian Private Equity and (The Portuguese Private Equity and des Investisseurs en Capital) Venture Capital Association) Venture Capital Association) AFIC is an independent organization. AIFI was founded in May 1986 in order APCRI was established in 1989 and is With 210 active members, AFIC brings to promote, develop and institutionally based in Lisbon. APCRI represents the together almost all of the private equity represent the private equity and venture Portuguese private equity and venture institutions in France. In addition, capital activity in Italy. The Association capital sector and promotes the asset class. AFIC has 110 associate members. is a non-profit organisation whose main APCRI’s role includes representing activities are: to create a favourable legal In order to create a clear set of standards the interests of the industry to regulators environment for the private equity and for the private equity business, AFIC and standard setters; developing venture capital investment activity, to drafted a "Code of Ethics", to which professional standards; providing analyse the Italian private equity market all members must adhere to. industry research; professional collecting statistical data, to organize AFIC regularly publishes reference development and forums, facilitating business seminars and specialized courses documents, which include the "Private interaction between its members and addressed to institutional investors and Equity Best Practices Guidelines". key industry participants including to people interested in operating within Lastly, AFIC issues recommendations institutional investors, entrepreneurs, the industry, to publish research papers on corporate governance which are policymakers and academics. regarding specific topics about the private designed to promote transparency equity market, to build up stable and APCRI’s activities cover the whole and responsibility. solid relationships with other National range of private equity: venture capital Venture Capital Associations and key (from seed and start-up to development players in the international private capital), buyouts and buyins. equity market. In order to carry out the APCRI represents the vast majority of above-mentioned activities, AIFI can private equity and venture capital in rely both on its permanent staff and on Portugal. APCRI has 16 full members different Technical Committees and 5 associate members. Full members established with the task to carry out are active in making equity investments activities of study on specific matters primarily in unquoted companies. and projects. APEA ASCRI The associate membership can include (The Arab Private Equity Association) (The Spanish Private Equity and those firms who invest directly in Venture Capital Association) APEA is the only pan-Arab industry private equity but for whom this is not association sponsored by the Economic ASCRI is a non-profit making association their principal activity, advisory firms Unity Council of the Arab League, the that was set up in 1986, to promote and experienced in dealing with private APEA was formed to address the develop the venture capital and private equity and educational or research challenges faced by private equity firms equity activity in Spain and represent, based institutions closely associated as well as venture capitalists in the Arab manage and defend its members’ with the industry. world. APEA believes that private professional interests. equity and venture capitalism can be The Association stimulates the promotion important catalysts for the provision and information analysis in the venture of economic opportunities, increased capital/private equity sector in Spain, investment flows, and superior business and provides the contact between Official performance for Arab industries. Organisations, investors, professional APEA's core mission is to increase advisers, business schools and other the role of this young but rapidly relevant institutions. At the end of growing industry in the Arab world, May 2005, ASCRI had 84 full members and strengthen the performance and 28 associate members. of private equity investment in the emerging Arab market. The ASCRI’s main activities are: Research activity, Organisation of different events such as: Annual General Assembly, ASCRI Congress, Training Seminars and Conferences/Workshops, Communication of investment opportunities between ASCRI members, and Institutional and lobbying activity. 37 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 38 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) ATIC AVCA (The Tunisian Venture Capital ATIC's third objective no less important (The African Venture Capital Association) is to inculcate the right private equity Association) and venture capital culture to local ATIC (Association Tunisienne des AVCA represents the private equity and professionals, to enhance the creation of Investisseurs en Capital) is a professional venture capital industry in Africa. a new generation of Funds managers association founded in April 2004, by AVCA was established in 2002 and its and to reach strategic alliances with more than 30 companies operating in head office is in Yaoundé, Cameroon. their European or US counterparts. the field of Private Equity and Venture AVCA’s membership is drawn from ATIC aims to reach that by enforcing Capital in Tunisia. Its main gaol is to across Africa and internationally. the best practices of the profession play the vis-a-vis with the Tunisian AVCA’s objectives are to represent the according to international standards, authorities to introduce the appropriate industry within Africa and internationally, through its planned training programs. legal and fiscal measures to ease the stimulate the growth and expansion development, and solve the problems of of the industry throughout Africa, the private equity and venture capital stimulate professional relationships and industry in Tunisia. co-operation, provide opportunities for professional development of industry ATIC second objective is to offer its practitioners, research, publish and members the appropriate space for circulate industry information and insights, networking, information exchange and provide policymakers with proposals to business development to upgrade the improve the corporate, fiscal and legal Tunisian industry by targeting higher environment for the industry, maintain value added technology projects, and high ethical and professional standards stronger alliances with its North African and contribute to the management and European Partners. development of investors, investees and other stakeholders. AVCA’s activities include an annual industry conference, a quarterly newsletter, research, training and advocacy programs. For more information visit the AVCA website www.avcanet.com. AVCAL AVCO • In addition it takes the role of an interface to international organisations (The Australian Venture Capital (The Austrian Private Equity and ex-changing experience, information Association) Venture Capital Organisation) and knowl-edge with other Private AVCAL represents the interests of AVCO is the National Association of Equity and Venture Capital Australia’s venture capital & private Austria's Private Equity and Venture Associations in Europe, with the equity industry. Capital industry, which covers more Euro-pean Commission and further than 90% of the Austrian Private Equity relevant institu-tions in order to put AVCAL’s 50 investor members have market with its members. inter-national best practice at work A$10 billion under management. for Austria. AVCAL’s roles include: promotion of • It works as a knowledgeable partner the industry, education of practitioners, and independ-ent information point Currently AVCO is engaged to initiate public policy development, staging for journalists, entrepre-neurs, internationally favourable private equity networking events, application of potential investors, private and public fund structures for Austria and recently valuation & disclosure guidelines, institu-tions as well as international AVCO has published Investor Relations benchmarking IRRs, development of bodies that are interested in Austria’s Guidelines – behavioural standards for its industry standard Limited Partnership Private Equity industry, its members vis-à-vis their fund investors – agreement. development and struc-ture as well in order to raise transparency and faith as its activi-ties and performance. in Private Equity as a professional asset AVCAL conducts about 40 networking • It acts as the official representative class in Austria. In line with these efforts events annually across Australia, and of the industry actively engaged in AVCO welcomes the International leverages its online presence at improving the tax-related, legal and Private Equity and Venture Capital www.avcal.com.au for maximum economic policy environments in close Guidelines and will be eager to support efficiency. connection with respec-tive policy their introduction and accurate makers. application by its members. • As a proactive networking institution it promotes co-operation inside the industry as well as interaction with com-plementary players from other fields in order to intensify information flows and create learning loops. 39 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 40 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) BVA BVCA (The Belgian Venturing Association) 2. Promote the well being of the Belgian (The British Venture Capital private equity and venture capital Association) BVA was founded in 1986 as a industry towards all relevant third professional association. The BVCA represents around 170 UK- parties. The objectives of the Its mission is to: based private equity and venture capital promotional activities are: to pro- firms, the vast majority of all such firms 1. Animate the Belgian private equity actively represent the Belgian VC/PE in the UK. The BVCA is the public face and venture capital industry by industry to third parties as the of the industry providing services to its deploying a series of activities for its industry's recognized spokesperson, members, investors and entrepreneurs members and for other stakeholders to conduct active lobbying for as well as the Government and media. in the prosperity of the VC/PE sector (i) improvements to or (ii) the in Belgium. The objectives of the main removal of obstacles from the animation activities are: to foster structural context in which the active networking amongst members Belgian VC/PE industry operates, of the BVA and between members of to contribute to the continuous the BVA and other third parties, to development of business in our provide extensive information to its industry. members on all topics relevant to the VC/PE industry, to improve the quality of the operation of the sector. BVK CVCA (Bundesverband Deutscher Science and research are becoming more (Canada’s Venture Capital & Kapitalbeteiligungsgesellschaften – and more interested in private equity and Private Equity Association) German Private Equity and venture capital issues. BVK supports The CVCA - Canada’s Venture Capital & Venture Capital Association e. V.) universities, colleges and their students Private Equity Association, was founded with their research activities and BVK was founded in 1989. in 1974 and is the association that problem solving. BVK represents most of the German represents Canada’s venture capital private equity and venture capital firms On the international level BVK and private equity industry. as well as the German branches of exchanges information with other Its over 1100 members are firms and foreign private equity and venture national organizations in the economic organizations which manage the capital firms. As per March 31, 2005, sector and other international private majority of Canada’s pools of capital BVK represented more than 180 private equity and venture capital associations. designated to be committed to venture equity and venture capital firms. capital and private equity investments. Apart from full membership BVK offers The CVCA fosters professional associate membership to companies and development, networking, communication, organizations working in this particular research and education within the business sector, i. e. accountants, venture capital and private equity sector lawyers, consultants etc. and represents the industry in tax and BVK serves as a link between regulatory matters. government and business and represents its members’ views, needs and problems while supplying information and discussing any particular political and economic subject with the relevant governmental institutions. 41 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 42 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) CVCA DVCA EVCA (Czech Venture Capital and (The Danish Venture Capital (European Private Equity and Private Equity Association) Association) Venture Capital Association) CVCA is an association representing DVCA is an association with the goal EVCA was established in 1983 and is companies active in the private equity of strengthening its member’s business, based in Brussels. EVCA represents and venture capital industry in the network, and competences. the European private equity sector and Czech Republic. CVCA has full DVCA includes a broad range of high promotes the asset class both within members (private equity and venture tech investors in Denmark. Europe and throughout the world. capital fund managers) and associated Furthermore the organisation covers the With well over 900 members in Europe, members (companies providing advisory whole investment chain from individual EVCA’s role includes representing the services to the private equity and business angels over venture capital interests of the industry to regulators venture capital industry). CVCA has 14 companies to private equity and and standard setters, developing full members and 16 associated members institutional investors. professional standards, providing as of May 2005. industry research, professional DVCA was founded in 2000 and was in development and forums facilitating CVCA’s priorities are: increasing the 2004 merged with the formerly known interaction between its members and awareness about private equity/venture Danish Business Angel Network. key industry participants including capital among entrepreneurs, state The association is situated in the Old institutional investors, entrepreneurs, administration and general public, Stock Exchange, Slotsholmsgade, policymakers and academics. promoting interests of CVCA members Copenhagen. For more information in contact with the government and please visit www.dvca.dk other state authorities, providing information on the private equity/ venture capital industry in the Czech Republic, providing platform for discussion among members of CVCA. FVCA HKVCA (The Finnish Venture Capital (Hong Kong Venture Capital The Association provides an effective Association) Association) channel of communication for members to share information on developments In 2005 the Finnish Venture Capital Hong Kong Venture Capital Association within the industry in Hong Kong/PRC Association (FVCA) celebrates it’s was established on November 12, 1987 as well as on a regional and international 15th year anniversary. The FVCA is with the objectives of promoting and level. It also works closely with the a non-profit organisation representing protecting the interests of the venture government and various trade bodies to the Finnish venture capital and private capital and private equity industry, further the interests of the industry. equity industry. The FVCA´s main networking and cooperation on regional mission is to promote and develop and international front, and in raising the venture capital and private equity the professional standards of the market. industry in Finland. The main tasks are Its 120 members are engaged in all levels public affairs, lobbying, networking and of venture capital, expansion capital and research. The FVCA has 43 full members. buyout activities in China, Japan, This represents the vast majority of Korea, Australia, Taiwan, Thailand, the Finnish venture capital and private Singapore, and other markets in Asia. equity companies. Full membership has been approved for equity investors and It is committed to the promotion of the risk financiers representing private and venture capital industry as a financial public investment capital, captive funds and business partner to businesses and corporate ventures. In addition, and the creation of an environment the FVCA has 68 associate members. that creates sound partnerships. Associate membership can be given It is dedicated to developing a high to organisations and individuals with standard of professionalism in the an interest in the venture capital and market to ensure investor confidence private equity industry. in the asset class. 43 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 44 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) HVCA ILPA IVCA (The Hungarian Venture Capital and (The Institutional Limited Partners (The Irish Venture Capital Private Equity Association) Association) Association) HVCA represents virtually every major The ILPA is a non-profit organization The IVCA is the representative body of source of funds and expertise of private committed to serving limited partner the venture capital industry in Ireland. equity in Hungary. HVCA aims to investors in the global private equity The association was established in 1985 promote the development of the industry by providing a forum for: to represent the views of its members industry, and to create and follow facilitating value-added communication, and to promote the Irish venture capital the highest possible professional enhancing education in the asset class, industry. We seek to encourage co- and ethical standards. and promoting research and standards operation and best practices within in the private equity industry the industry and to facilitate those HCVA was set up in 1991 and has seeking venture capital. The IVCA developed considerably since then: Initially founded as an informal also continuously works with those the original five members have grown networking group, the ILPA is a individuals and organisations committed to 26 full members, 29 associate voluntary association funded by its to fostering an economic and regulatory members and 9 individual members. members. The ILPA membership has climate conducive to the growth and grown to include more than 138 member The Association provides a regular development of an enterprising economy organizations from 10 countries, who forum for the exchange of ideas among in total have assets under management members, high-level discussions on the in excess of two trillion U.S. dollars. topical issues of the venture capital and Members of the ILPA manage more than private equity industry and the future US$300 billion of private equity capital. trends. As the official representative of the industry it is in constant discussion The ILPA membership comprises with the financial and legislator corporate and public pension plans, institutions of the Hungarian State and endowments and foundations, insurance with other professional organisations. companies and other institutional investors in private equity. The ILPA holds semi-annual meetings for members. LVCA NVCA (The Latvian Venture Capital (The Norwegian Venture Capital & NVCA provides knowledge, analysis Association) Private Equity Association) and general information to the Government and media to communicate To promote the development of venture NVCA is a non-profit association the importance of the industry and it’s capital sector in Latvia, the six biggest supporting the interests of the companies role in the national innovation system companies that operate in the venture active in the Norwegian industry. and the general industrial development capital sector in Latvia have founded a NVCA was established in 2001 by the in Norway. public organization: the Latvian Venture leading players, and represents today Capital Association. The founders of around 40 Norway-based private equity NVCA is in this way the public face the association are fund management and venture capital firms, the vast of the industry providing services to its companies that manage investment majority of such firms in Norway. members, investors and entrepreneurs funds of different value and function The 20 associated members are service as well as the Government and media. profile. providers to the industry such as lawyers, advisors, investors and LVCA has the following missions: to corporate finance companies. inform businessmen and society about venture capital financing possibilities, The purpose of the association is to promote the exchange of opinions to promote an efficient private equity and experience of the members of the market, to improve the regulations of the association, to represent opinions and industry, to promote entrepreneurship interests of the members in negotiations and to ensure political focus on Norway’s with public authorities, to organize and position as a strong and attractive to ensure cooperation with international country for international investments. or other countries’ venture capital associations. 45 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 46 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) NVP PPEA R É S EA U C A P I TA L (Nederlandse Vereniging van (Polish Private Equity Association) (The Québec Venture Capital and Participatiemaatschappijen) Private Equity Association) PPEA gathers private equity/venture The Dutch Private Equity & Venture capital funds active in Poland. The mission The Québec Venture Capital and Private Capital Association acts in the interests of PPEA, established in January 2002, is Equity Association has more than of private equity companies in the to promote and develop the private equity 500 members who represent public and Netherlands. The aims of the NVP are: in and venture capital (pe/vc) industry in private venture capital companies as cooperation with the government, work Poland and to represent the interests of well as firms of professionals serving on an adequate regulatory framework for the Polish pe/vc community in Poland and the industry. the private equity sector and its clients; abroad. PPEA comprises 51 institutions: Mission and Organizational Structure inform entrepreneurs and businesses 29 full members, representing most of the Réseau Capital is an association of key about the financing possibilities of private private equity firms active in poland and players in the private equity and venture equity; inform investors about the 22 Associate Members that are law and capital industry. Its mission is to foster characteristics of private equity as an consulting companies working for pe/vc the growth of the industry and the asset class; raise awareness and improve industry. The full members manage more professional development of its members the image of private equity to achieve than EUR 4.5bn and have currently through a range of services and activities, aforementioned goals; contribute to nearly 300 Polish companies and over such as training, information, networking further raising the level of professionalism 50 companies in other CEE countries on and promotion of their interests. of the private equity sector. their portfolios. Principal Objectives The NVP has about 50 members and PPEA has established a number of To further the development of a business 50 associated members. Members of committees to work on PPEA policy and environment favourable to the venture the NVP represent 95% of the number actions. The committees bring together full capital community, notably, through of private equity investments and about and associate members who represent training activities; To establish an 85% of the total invested capital in the their areas of expertise. To date, PPEA efficient network of relations and Netherlands. has established committees to work on the communications between the industry's following areas: corporate governance, More information about the activities of stakeholders; To promote venture capital legal and lobbying, pension funds and the NVP and its members can be found as an efficient tool for the development of other domestic investors, SME financing on www.nvp.nl. Québec businesses, and to promote other and innovations, and statistics. organizations tied into the industry RVCA SAVCA (The Russian Private Equity and (The Southern African Venture The main objectives of SAVCA are to: Venture Capital Association) Capital and Private Equity promote the venture capital and private Association) equity profession in Southern Africa; RVCA was set up in 1997. The central represent the profession at the national office of RVCA is situated in St.Petersburg. SAVCA is a non-profit Section 21 and international level; develop and By today RVCA unites about 40 members Company based in South Africa stimulate professional and transactional more than half of them are private equity that represents the interests of the venture capital and private equity and venture capital funds. participants of the Private Equity and investments; stimulate the expansion Venture Capital industry in Southern RVCA’s mission is to contribute to of venture capital and private equity; Africa. All the key participants in the establishment and development of collect information from markets and industry are members of the Association. venture industry in Russia. from members; circulate information; Full membership of SAVCA provides stimulate and maintain contacts within RVCA’s goals are: to create a political and a high level of endorsement and denotes the membership; contribute to the entrepreneurial environment favorable a high level of professionalism and management development of investors for investment activity in Russia, to integrity for the member firm. and investees; provide the relevant represent RVCA’s interests in political SAVCA plays a meaningful role in the authorities with proposals for and administrative agencies, in mass Southern African Venture Capital and improvement in the corporate, fiscal media, in financial and industrial circles Private Equity industry by promoting and legal environment for venture in Russia and abroad, to provide the industry and its members, promoting capital and private equity in Southern informational support and create self-regulation, setting professional Africa; and maintain ethical and communicative forums for Russian standards, lobbying, disseminating professional standards. venture market players, to create the information on the industry, arranging stratum of experts qualified to work in training for the staff of its members and venture business companies. RVCA is the researching the industry in South Africa. unique professional organization in Russia units the progressive financial institutions investing in private Russian companies. RVCA is generally accepted in the business community and by the Russian Government. 47 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 48 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) SECA SLOVCA (The Swiss Private Equity and In addition to promoting corporate (The Slovak Venture Capital Corporate Finance Association) finance in the public, SECA provides Association) a platform to its members to exchange SECA is the representative body for SLOVCA was created in 1995 with information and experiences. The main Switzerland’s private equity, venture primary purpose to increase the activities of SECA are: seminars and capital and corporate finance industries. awareness of private equity and venture events about relevant topics, publication SECA has the objective to promote capital to the public, such as the of statistics about private equity private equity and corporate finance entrepreneurs, investment and banking investment and management buyout activities in Switzerland. institutions and the economic, political activities in Switzerland, quarterly and regulatory bodies in Slovakia. Members of the SECA include equity edition of a newsletter SECA News investment companies, Banks, (for members only), contacts of other The mission of SLOVCA includes five Corporate Finance Advisors, Auditing associations and state bodies. key objectives: to provide information Companies, Management Consultants to those seeking capital for new and and Private Investors. existing enterprises, to represent the interests of members before the The association is a non-profit government and other related organization and has the following institutions/agencies, to provide a forum purposes: to promote corporate finance for networking for members to exchange and private equity activities in the public views and practices, to provide and the relevant target groups, to education and training for members of promote the exchange of ideas and SLOVCA and others, to encourage the the cooperation between members, to highest standards of business practices. contribute to the professional education and development of the members and their clients, to represent the members views and interests in discussion with government and other bodies, to establish and maintain ethical and professional standards. N OT E S 49 I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M 50 These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) N OT E S These guidelines have been developed by the Association Française des Investisseurs en Capital (AFIC), the British Venture Capital Association (BVCA) and the European Private Equity and Venture Capital Association (EVCA) with the valuable input and endorsement of the following associations: AIFI - Italian Private Equity and Venture Capital Association APCRI - Portuguese Private Equity and Venture Capital Association APEA - Arab Private Equity Association ASCRI - Spanish Private Equity and Venture Capital Association ATIC - Tunisian Venture Capital Association AVCA - African Venture Capital Association AVCAL - Australian Venture Capital Association AVCO - Austrian Private Equity and Venture Capital Organization BVA - Belgian Venturing Association BVK - German Private Equity and Venture Capital Association e.V. CVCA - Canada’s Venture Capital and Private Equity Association CVCA - Czech Venture Capital and Private Equity Association DVCA - Danish Venture Capital Association FVCA - Finnish Venture Capital Association HKVCA - Hong Kong Venture Capital Association HVCA - Hungarian Venture Capital and Private Equity Association ILPA - Institutional Limited Partners Association IVCA - Irish Venture Capital Association LVCA - Latvian Venture Capital Association NVCA - Norwegian Venture Capital & Private Equity Association NVP - Nederlandse Vereniging van Participatiemaatschappijen PPEA - Polish Private Equity Association Réseau Capital - Québec Venture Capital and Private Equity Association RVCA - Russian Private Equity and Venture Capital Association SAVCA - Southern African Venture Capital and Private Equity Association SECA - Swiss Private Equity and Corporate Finance Association SLOVCA - Slovak Venture Capital Association (Endorsement as of 1st of November 2005) I N T E R N AT I O N A L P R I VAT E E Q U I T Y A N D V E N T U R E C A P I TA L V A LUAT I O N G U I D E L I N E S W W W . P R I VAT E EQ U I T Y VA LU AT I O N . CO M These guidelines have been developed by AFIC, BVCA and EVCA with the valuable input and endorsement of the following associations: AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, DVCA, FVCA, HKVCA, HVCA, ILPA, IVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA (Endorsement as of 1st of November 2005) For further information please visit: www.privateequityvaluation.com
"International Private Equity and Venture Capital Valuation Guidelines"