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 Edition October 2006 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 HVCA - Hungarian Venture Capital and Private Equity Association APCRI - Portuguese Private Equity and Venture Capital Association ILPA - Institutional Limited Partners Association APEA - Arab Private Equity Association IVCA - Irish Venture Capital Association ASCRI - Spanish Private Equity and Venture Capital Association LAVCA - Latin American Venture Capital Association ATIC - Tunisian Venture Capital Association LVCA - Latvian Venture Capital Association AVCA - African Venture Capital Association NVCA - Norwegian Venture Capital & Private Equity AssociationAVCAL - Australian Private Equity and Venture Capital Association NVP - Nederlandse Vereniging van Participatiemaatschappijen AVCO - Austrian Private Equity and Venture Capital Organization (Dutch Private Equity and Venture Capital Association) BVA - Belgian Venturing Association PPEA - Polish Private Equity Association BVK - German Private Equity and Venture Capital Association e.V. Réseau Capital - Québec Venture Capital and CVCA - Canada’s Venture Capital and Private Equity Association Private Equity Association CVCA - China Venture Capital Association RVCA - Russian Private Equity and Venture Capital Association CVCA - Czech Venture Capital and Private Equity Association SAVCA - Southern African Venture Capital and DVCA - Danish Venture Capital Association Private Equity Association EMPEA - Emerging Markets Private Equity Association SECA - Swiss Private Equity and Corporate Finance Association FVCA - Finnish Venture Capital Association SLOVCA - Slovak Venture Capital Association GVCA - Gulf Venture Capital Association SVCA - Swedish Private Equity and Venture Capital Association HKVCA - Hong Kong Venture Capital Association (Endorsement as of 2nd January 2007)
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 MThese guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007)
P L EA S E N OT EThe information contained within this paper has been produced with reference tothe contributions of a number of sources. AFIC, BVCA and EVCA have taken suitablesteps to ensure the reliability of the information presented. However, neither AFIC,BVCA, EVCA nor other named contributors, individuals or associations can acceptresponsibility for any decision made or action taken, based upon this paper orthe 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 4These guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007)
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, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCAP R E FAC EThese Guidelines set out recommendations, intended to represent current bestpractice, 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 investmentsin early stage ventures, management buyouts, management buy-ins and similartransactions and growth or development capital.The recommendations are intended to be applicable across the whole range ofinvestment types (seed and start-up venture capital, buy-outs, growth/developmentcapital, 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 Millustrations, background material, context and supporting commentary, which areprovided to assist in the interpretation of the recommendations, are set out innormal type.Where there is conflict between a recommendation contained in these Guidelinesand the requirements of any applicable laws or regulations or accounting standardor generally accepted accounting principle, the latter requirements should takeprecedence.Neither the AFIC, BVCA, EVCA nor the endorsing associations nor the membersof any committee or working party thereof can accept any responsibility or liabilitywhatsoever (whether in respect of negligence or otherwise) to any party as a resultof anything contained in or omitted from the Valuation Guidelines nor for theconsequences of reliance or otherwise on the provisions of these Valuation Guidelines.These Valuation Guidelines should be regarded as superseding previous guidelinesissued by the AFIC, BVCA or EVCA with effect for reporting periods post1 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 MThese guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007) 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 25 Introduction 25 1 Selecting the Appropriate Methodology 25 2 Specific Considerations 27 2.1 Internal Funding Rounds 27 2.2 Bridge Financing 27 2.3 Mezzanine Loans 28 2.4 Rolled up Loan Interest 28 2.5 Indicative Offers 29 3 Events to Consider for their Impact on Value 29 4 Impacts from Structuring 31 WORKGROUP 33
INTRODUCTION INTRODUCTION However, the requirements and A distinction is made in these Guidelines implications of the Financial Reporting between a basis of valuation (such asPrivate Equity Managers may be Standards and in particular International Fair Value), which defines what therequired to carry out periodic valuations Financial Reporting Standards and US carrying amount purports to represent,of Investments as part of the reporting GAAP have been considered in the and a valuation methodology (such asprocess to investors in the Funds they preparation of these guidelines. This has the earnings multiple technique), whichmanage. The objective of these Guidelines been done, in order to provide a frame- details the method or technique foris to set out best practice where private work for arriving at a Fair Value for deriving a valuation.equity Investments are reported at “Fair private equity and venture capitalValue”, with a view to promoting best Investments which is consistent withpractice and hence helping investors in accounting principles. DEFINITIONSPrivate Equity Funds make better The following definitions shall apply in These guidelines are intended to representeconomic decisions. these Guidelines. current best practice and therefore willThe increasing importance placed by be revisited and, if necessary, revised tointernational accounting authorities on reflect changes in international Enterprise ValueFair Value reinforces the need for the regulation or accounting standards. The Enterprise Value is the value ofconsistent use of valuation standards the financial instruments representing It is not a requirement of accounting ownership interests in an entity plusworldwide and these guidelines provide a principles that these guidelines are the net financial debt of the entity.framework for consistently determining followed. However compliance withvaluations for the type of Investments these accounting principles can be Fair Valueheld by private equity and venture achieved by following the guidelines. The Fair Value is the amount for whichcapital entities. These Guidelines are concerned with an asset could be exchanged betweenThe accounts of Private Equity Funds valuation from a conceptual standpoint knowledgeable, willing parties in an arm’sare governed by legal or regulatory and do not seek to address best practice length transaction. This is congruentprovisions or by contractual terms. It is as it relates to investor reporting, in concept with alternately wordednot the intention of these Guidelines to internal processes, controls and definitions such as ‘Fair Value is theprescribe or recommend the basis on procedures, governance aspects, price that would be received for an assetwhich Investments are included in the Committee oversights, the experience or paid for a liability in a transactionaccounts of Funds. and capabilities required of the Valuer between market participants at the or the audit or review of valuations. reporting date’. 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 8These guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007)Fund Marketability Quoted InstrumentThe Fund, i.e. a private equity or Marketability is defined as the relative ease A Quoted Instrument is any financialventure capital fund, is the generic term and promptness with which an instrument instrument for which quoted pricesused in these Guidelines to refer to any may be sold when desired. Marketability reflecting normal market transactions aredesignated pool of investment capital implies the existence of current buying readily and regularly available from antargeted 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 Discountinvestment vehicles. Realisation The Marketability Discount is the consequence of the return Market Realisation is the sale, redemption orGross Attributable Enterprise Value Participants demand to compensate repayment of an Investment, in whole orThe Gross Attributable Enterprise Value for the risk arising from the lack in part; or the insolvency of an Investeeis the Enterprise Value attributable to the of Marketability. Company, where no significant return tofinancial instruments held by the Fund the Fund is envisaged.and other financial instruments in the Market Participantsentity that rank alongside or beneath the Unquoted Instrument Market Participants are potential orhighest 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 havingThe term Investee Company refers to a reasonable knowledge of relevant facts Underlying Businesssingle business or group of businesses in and who have the ability to perform The Underlying Business is thewhich 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 aInvestment related to the enterprise. number of dedicated holding companies.A Fund’s Investment refers to all of the Net Attributable Enterprise Valuefinancial instruments in an Investee ValuerCompany 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 NFair Value is the amount for which an asset could be Investments should be reported at Fair Value at theexchanged 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 theUnderlying 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 Valuerin the near future. should apply a methodology that is appropriate in lightThe objective is to estimate the exchange price at which of the nature, facts and circumstances of the Investmenthypothetical Market Participants would agree to transact. and its materiality in the context of the total Investment portfolio and should use reasonable data and market inputs,Fair Value is not the amount that an entity would receive or assumptions and estimates.pay in a forced transaction, involuntary liquidation ordistressed sale. In private equity, value is generally crystallised through a sale or flotation of the entire business, rather than a sale of anAlthough transfers of shares in private businesses are often individual stake. Accordingly the Value of the business as asubject to restrictions, rights of pre-emption and other whole (Enterprise Value) will provide a base for estimatingbarriers, 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 10These guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007)(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 theIt is important to recognise the subjective nature of private reporting date where they provide additional evidence ofequity Investment valuation. It is inherently based on conditions that existed at the reporting date; andforward-looking estimates and judgments about the • take account of materiality considerations.Underlying Business itself, its market and the environment inwhich it operates, the state of the mergers and acquisitions Because of the uncertainties inherent in estimating Fairmarket, stock market conditions and other factors. Value for private equity Investments, a degree of caution should be applied in exercising judgment and making theDue to the complex interaction of these factors and often the necessary estimates. However, the Valuer should be warylack of directly comparable market transactions, care should be of applying excessive caution.applied when using publicly available information in deriving avaluation. In order to determine the Fair Value of an Investment, Private Equity Funds often undertake an Investment withthe Valuer will have to exercise judgement and make necessary a view to effecting substantial changes in the Underlyingestimates 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 rescuecurrency 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 EWhilst it might be difficult in these situations to determine In situations where Fair Value cannot be reliably measuredFair Value based on a transaction involving a trade purchaser, the Valuer may reasonably conclude that the Fair Valueit should in most cases be possible to estimate the amount a at the previous reporting date remains the best estimate ofPrivate Equity Fund would pay for the Investment in question. Fair Value, unless there is evidence that the Investment has since then been impaired. In such a case the carrying valueThe Valuer will need to assess whether, in the particular should be reduced to reflect the estimated extent ofcircumstances of a specific Investment, he is able reliably impairment.to measure Fair Value by applying generally acceptedmethodologies in a consistent manner based on reasonable In respect of Investments for which Fair Value cannot beassumptions. reliably measured, the Valuer is required to consider whether events or changes in circumstances indicate that anThere may be situations where: impairment may have occurred.• the range of reasonable Fair Value estimates is significant Where an impairment has occurred, the Valuer should reduce• the probabilities of the various estimates within the range the carrying value of the Investment to reflect the estimated cannot be reasonably assessed extent of impairment. Since the Fair Value of such Investments cannot be reliably measured, estimating the• the probability and financial impact of achieving a key extent of impairment in such cases will generally be an milestone cannot be reasonably predicted intuitive (rather than analytical) process and may involve• there has been no recent Investment into the business. reference to broad indicators of value change (such as relevant stock market indices).In these situations, the Valuer might conclude that Fair Valuecannot 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 12These guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007) 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 EDifferential allocation of proceeds may have an impact on it is also important to consider the stage of developmentthe value of an Investment. If liquidation preferences exist, of an enterprise and/or its ability to generate maintainablethese 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 isthe detriment of the Fund. the most appropriate and consequently make valuationFurther examples of specific matters for consideration that adjustments on the basis of their informed and experiencedmay 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 giventhe 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 eachWhere 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 reportingpurposes should be done using the bid spot exchange rate • the stage of development of the enterprise; andprevailing at the reporting date. • any additional considerations unique to the subject enterprise.3.2 Selecting the Appropriate Methodology In assessing whether a methodology is appropriate,The Valuer should exercise her or his judgement to select the Valuer should be biased towards those methodologiesthe valuation methodology that is the most appropriate that draw heavily on market-based measures of risk andfor a particular Investment. return. Fair Value estimates based entirely on observable market data will be of greater reliability than those basedThe key criterion in selecting a methodology is that it on assumptions.should be appropriate in light of the nature, facts andcircumstances of the Investment and its materiality in Methodologies utilising discounted cashflows and industrythe context of the total Investment portfolio. benchmarks should rarely be used in isolation of the market-based measures and then only with extreme caution.An appropriate methodology will incorporate available These methodologies may be useful as a cross-check ofinformation about all factors that are likely materially to values estimated using the market-based methodologies.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 14These guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007) Where the Valuer considers that several methodologies are 3.3 Price of Recent Investment appropriate to value a specific Investment, the Valuer may Where the Investment being valued was itself made recently, consider the outcome of these different valuation its cost will generally provide a good indication of Fair methodologies so that the results of one particular method Value. Where there has been any recent Investment in the may be used as a cross-check of values or to corroborate Investee Company, the price of that Investment will provide or otherwise be used in conjunction with one or more other a basis of the valuation. methodologies in order to determine the Fair Value of the Investment. The validity of a valuation obtained in this way is inevitably eroded over time, since the price at which an Investment was Methodologies should be applied consistently from made reflects the effects of conditions that existed when the period to period, except where a change would result transaction took place. In a dynamic environment, changes in in better estimates of Fair Value. market conditions, the passage of time itself and other factors This may occur for example in the case of a company will act to diminish the appropriateness of this methodology becoming profitable and cash flow becoming positive on as a means of estimating value at subsequent dates. a maintainable basis a few years after the start-up phase. In addition, where the price at which a third party has Any changes in valuation methodologies should be clearly invested is being considered as the basis of valuation, the stated. It is expected that there would not be frequent background to the transaction must be taken in to account. changes in valuation methodologies. In particular, the following factors may indicate that the price The table below identifies a number of the most widely used was not wholly representative of the Fair Value at the time: methodologies. • a further Investment by the existing stakeholders with METHODOLOGY little new Investment; Price of Recent Investment • different rights attach to the new and existing Investments; Earnings multiple 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 ‘rescue package’; or Discounted cash flows (from the Investment) 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 EThis methodology is likely to be appropriate for all private service financial instruments, breaches of covenantsequity Investments, but only for a limited period after the and a deterioration in the level of budgeted or forecastdate 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 inand 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 themethodology will often be appropriate for valuing business operates;Investments in such circumstances. • market conditions have deteriorated. This may be indicatedThe length of period for which it would remain appropriate to by a fall in the share prices of quoted businesses operatinguse this methodology for a particular Investment will depend in the same or related sectors; oron the specific circumstances of the case, but a period of oneyear is often applied in practice. • the Underlying Business is raising money and there is evidence that the financing will be made under significantlyIn 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 orthe price at which a significant amount of new Investmentinto the company was made to estimate the Fair Value of 3.4 Earnings Multiplethe Investment, but only for a limited period following This methodology involves the application of an earningsthe date of the relevant transaction. During the limited multiple to the earnings of the business being valued inperiod following the date of the relevant transaction, the order to derive a value for the business.Valuer should in any case assess whether changes orevents subsequent to the relevant transaction would This methodology is likely to be appropriate for animply 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 beFor example, a reduction in the Investment’s Fair Value maintainable.may have occurred for a number of reasons, includingthe 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 16These guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007) 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 EReasonable 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 tomarket-based multiples, reflected in the market valuations It is important that the earnings multiple of each comparatorof quoted companies or the price at which companies have is adjusted for points of difference between the comparatorchanged ownership. This market-based approach presumes and the company being valued. These points of differencethat the comparator companies are correctly valued by should be considered and assessed by reference to the twothe market. Whilst there is an argument that the market key variables of risk and earnings growth prospects whichcapitalisation of a quoted company reflects not the value of underpin the earnings multiple. In assessing the risk profilethe company but merely the price at which “small parcels” of the company being valued, the Valuer should recogniseof shares are exchanged, the presumption in these that risk arises from a range of aspects, including the natureGuidelines is that market based multiples do correctly of the company’s operations, the markets in which it operatesreflect 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 ofWhere market-based multiples are used, the aim is to private equity, its capital structure and the ability of the Fundidentify 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 aresimilar 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 theP/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; orIn using EV/EBITDA multiples, the Valuer should notethat such multiples, by definition, remove the impact on • for any other reason has poor quality earnings.value of depreciation of fixed assets and amortisation ofgoodwill and other intangibles. If such multiples are usedwithout sufficient care, the Valuer may fail to recognisethat business decisions to spend heavily on fixed assets orto 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 18These guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007) 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 EAppropriate 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 tobe 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 withquestion of judgment. It should be noted that the Fair Value like-minded shareholders to require the other shareholdersconcept 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 ofthe 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 aSome of the factors the Valuer should consider in this successful Realisation? This may be the case where therespect 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 20These guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007) By way of illustration for unquoted securities: 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 EThis methodology may also be appropriate for a business that 3.6 Discounted Cash Flows or Earningsis 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 businessselling its assets. In the context of private equity, it may by calculating the present value of expected future cashtherefore be appropriate, in certain circumstances, for flows (or the present value of expected future earnings, as avaluing Investments in loss-making companies and surrogate for expected future cash flows). The cash flowscompanies 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 ini. 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 businessesii. 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-adjustediv. 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 thisin 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 22These guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007) 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 EHowever the need to make detailed cash flow forecasts over 3.8 Industry Valuation Benchmarksthe Investment life may reduce the reliability and crucially A number of industries have industry-specific valuationfor 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 televisionWhere the Investment comprises equity or a combination companies). Other industries, including certain financialof equity and other financial instruments, the terminal value services and information technology sectors and somewould 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 assumptionperformance and developments and stock market and other that investors are willing to pay for turnover or marketvaluation ratios at the assumed Realisation date. In the case share, and that the normal profitability of businesses inof 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 toinstruments, the terminal value will usually be a pre-defined be reliable and therefore appropriate as the main basisamount, which greatly enhances the reliability of the valuation. of estimating Fair Value in limited situations, and is moreIn circumstances where a Realisation is not foreseeable, likely to be useful as a sense-check of values producedthe 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 Pricesprivate equity) may arise where the Fund has little ability toinfluence 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 an active stock market should bemethodology to estimate the Fair Value of an Investment, valued 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 marketInvestment, using reasonable assumptions and estimations price quoted, representing, for example, the value at whichof 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 thatquantifies 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 24These guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA,HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA(Endorsement as of 2nd January 2007) For other Quoted Instruments there are two market prices In the case of a six-month lock-up period, in practice a at any one time: the lower “bid” price quoted by a market discount of 20% to the market price is often used at the maker, which he will pay an investor for a holding (i.e. the beginning of the period, reducing to zero at the end of the investor’s disposal price), and the higher “offer” price, which period. an investor can expect to pay to acquire a holding. A third If a different level of discount is appropriate in light of the price basis for valuation purposes, as an alternative to either particular circumstances of an Investment, the Valuer should bid or offer, is the mid-market price (i.e. the average of the use that rate and should disclose the fact that he has done so bid and offer prices). Where a bid and offer price exists, the together with the rationale for so doing. bid price should be used, although the use of the mid-market price will not usually result in a material overstatement of value. This methodology should apply when the bid prices are set on an active market. An instrument is regarded as quoted on an active market if quoted prices are readily and regularly available from an exchange, broker, dealer, industry group, pricing services or regulatory agency, and those prices represent actual and regularly occurring market transaction on arm’s length basis. Marketability Discounts should generally not be applied to prices quoted on an active market, unless there is some contractual, Governmental or other legally enforceable restriction preventing realisation at the reporting date. In determining the level of Marketability Discount to apply the Valuer should consider the extent of compensation a holder would require when comparing the Investment in question with an identical but unrestricted holding.