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


...
Contents

          Section                                      Slides
                 Introduction                     ...
Introduction

     This presentation is a detailed analysis of the results of a
     survey on guidelines, policies, and p...
Introduction (continued)

     Phase III of the project will identify all commonly used
     valuation practices and, by m...
Executive summary

   • 368 out of 738 participants responded to the survey (48%).
     Of these, 230 are primarily ventur...
Executive summary (continued)

   • Firms report that improved LP reporting and greater
     transparency will be the bene...
Characteristics of survey respondents


                                     Size of Last Fund Raised
                72%
...
Characteristics of survey respondents


                                             Year of First Fund

                 ...
Almost 50% of firms would like to see an
   industry valuation standard



                                   46%

       ...
Venture firms are slightly more in favor of an
   industry valuation standard


                                   48%    ...
Small venture firms are comparatively more
      interested in an industry standard

                                     ...
Small and midsize buyout firms are also more
      interested in an industry valuation standard

                         ...
Write-in comments provide added support for an
   industry valuation standard

     • 123 of 368 firms (33%) provided writ...
Typical positive comments include

     • “An industry-wide valuation standard would develop a level
       playing field,...
Typical negative comments include

     • “I assume that you are referring to standard valuation
       practices. I do no...
Many firms report that an industry valuation
   standard is “important” or “very important”


                            ...
Comparatively, more venture firms report that a
   standard is “important” or “very important”



                        ...
Small venture firms place a higher importance on
           an industry valuation standard

                              ...
About one-third of buyout firms report that a
           standard is “important” or “very important”

                    ...
Firms indicate that there will be real benefits if a
           standard is developed

              Improved LP          ...
Both venture and buyout firms acknowledge that
   improved LP reporting will be a benefit


                              ...
Venture and buyout firms also indicate that
   improved transparency will be a benefit


                                 ...
Firms indicate that there will be significant
           challenges to developing a standard

           Low likelihood of...
Venture and buyout firms are both concerned with
   the low likelihood of agreement in the industry


                    ...
However, large venture firms are particularly
     concerned with low likelihood of agreement

                           ...
Firms are equally concerned with the difficulty of
   designing components of a single standard


                        ...
However, larger venture firms are more concerned with
     difficulty in designing components of a single standard


     ...
Firms are concerned with the confidentiality of
   individual company valuations


                                       ...
Midsize buyout firms are especially concerned about
     the confidentiality of company valuations

                      ...
Venture firms are more likely to carry pre-IPO investments
     at cost with adjustments for subsequent financing events

...
Venture firms are more likely to revalue a
     company when new outside financing occurs

           What events cause fi...
Venture firms are more likely to revalue portfolio
    companies quarterly


                      Venture Firms          ...
Venture firms are more aware of existing
    valuation standards

                      Venture Firms                     ...
Large venture firms are more aware of current
   standards compared to small venture firms

                              ...
Venture firms are more likely to use existing
     standards as the basis for internal guidelines

                     Ve...
Midsize and large venture firms are more likely to use
   existing standards as the basis for internal guidelines

       ...
When aware of existing standards, venture firms
     are more likely to use them for internal guidelines

                ...
Firms indicate that a PE industry association
     should lead the effort if a standard is developed


        51%



    ...
PE Industry
                                      Association




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



                         ...
Venture firms are more interested in being part of
     the process of creating an industry standard


                   ...
Acknowledgements

     • The survey questionnaire was developed by Professor
       Colin Blaydon with the assistance of F...
About the Foster Center for Private Equity

       The Foster Center for Private Equity focuses on macro and micro issues ...
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  1. 1. Private Equity Valuation Survey Results Foster Center for Private Equity Tuck School of Business at Dartmouth May 2003
  2. 2. Contents Section Slides Introduction 3-4 Executive summary 5-6 Survey population and respondents 7-8 Analysis and discussion of results 9-39 Acknowledgements 39 About the center for private equity 40 2 Foster Center for Private Equity
  3. 3. Introduction This presentation is a detailed analysis of the results of a survey on guidelines, policies, and practices for valuation in the private equity industry (both venture capital and buyout). The survey was conducted by the Foster Center for Private Equity at the Tuck School of Business at Dartmouth College. Over 700 firms of all sizes and geographical locations within the US received the survey. Phase I of the study (survey of venture firms) was completed from April to July of 2002. Phase II of the study (survey of buyout firms) was completed from January to March of 2003. 3 Foster Center for Private Equity
  4. 4. Introduction (continued) Phase III of the project will identify all commonly used valuation practices and, by means of a survey, will determine the most useful and acceptable components of a valuation guideline. This will be conducted in the Winter of 2003. 4 Foster Center for Private Equity
  5. 5. Executive summary • 368 out of 738 participants responded to the survey (48%). Of these, 230 are primarily venture focused (62%) and 138 are primarily buyout focused (38%). • Both venture and buyout firms indicate that an industry-wide valuation standard is important and have a real interest in seeing one developed. • However, firms also see challenges to developing a standard and have real differences of opinion about specific details of a standard. • More than half of the respondents prefer that a private equity industry association take the lead in developing reporting standards. 5 Foster Center for Private Equity
  6. 6. Executive summary (continued) • Firms report that improved LP reporting and greater transparency will be the benefits of a standard. • 51% of firms report that they are aware of existing valuation proposals and standards (NVCA, BVCA or EVCA) • However, only 30% of firms acknowledge that they use the existing proposals/standards as a basis for internal guidelines. • In comparing venture and buyout, 63% of venture firms that were aware of existing proposals/standards use one as a basis for internal guidelines, compared to only 47% for buyout firms. • 46% of firms would like to be part of the process of creating an industry valuation standard. 6 Foster Center for Private Equity
  7. 7. Characteristics of survey respondents Size of Last Fund Raised 72% 51% 22% 23% 17% 10% Last fund Last fund Last fund Last fund Last fund Last fund < $250M $251 to > $750M < $250M $251 to > $750M $750M $750M Venture Firms Buyout Firms Note: percentages do not add to 100% because some survey participants did not respond to the question 7 Foster Center for Private Equity
  8. 8. Characteristics of survey respondents Year of First Fund 56% 50% 29% 21% 14% 12% 6% 3% 1980 or 1980 to 1990 to 2000 or 1980 or 1980 to 1990 to 2000 or before 1989 1999 after before 1989 1999 after Venture Firms Buyout Firms Note: percentages do not add to 100% because some survey participants did not respond to the question 8 Foster Center for Private Equity
  9. 9. Almost 50% of firms would like to see an industry valuation standard 46% 30% 23% Yes Not Sure No Question: Would you like to see an industry standard for valuation practices? 9 Foster Center for Private Equity
  10. 10. Venture firms are slightly more in favor of an industry valuation standard 48% 43% 48% 43% 30% 30% 25% 21% Yes Not Sure No Yes No Not Sure Venture Firms Buyout Firms 10 Foster Center for Private Equity
  11. 11. Small venture firms are comparatively more interested in an industry standard Venture Firms 51% 41% 41% 60% 60% 60% 51% 50% 50% 50% 41% 41% 40% 40% 36% 40% 32% 32% 30% 30% 30% 27% 23% 20% 16% 20% 20% 10% 10% 10% 0% 0% 0% Yes Not Sure No Yes Not Sure No Yes Not Sure No Smaller Funds Mid Size Funds Larger Funds Last fund < $250M Last fund $251M - $750M Last fund > $750M 11 Foster Center for Private Equity
  12. 12. Small and midsize buyout firms are also more interested in an industry valuation standard Buyout Firms 44% 48% 34% 50% 60% 60% 44% 45% 50% 48% 50% 40% 35% 31% 35% 38% 30% 40% 40% 34% 24% 25% 30% 30% 25% 20% 20% 16% 20% 15% 10% 10% 10% 5% 0% 0% 0% Yes Not Sure No Yes Not Sure No Yes Not Sure No Smaller Funds Mid Size Funds Larger Funds Last fund < $250M Last fund $251M - $750M Last fund > $750M 12 Foster Center for Private Equity
  13. 13. Write-in comments provide added support for an industry valuation standard • 123 of 368 firms (33%) provided write-in comments on the positive or negative aspects of a valuation standard • 93 of the 123 (76%) indicate that an industry standard would benefit the industry. Most comments state that a standard would help improve the comparability between funds, reporting, and transparency. • However, 25 of 123 firms (20%) state that a standard would not be a benefit. Most comments indicate that inefficiency and lack of transparency are good for the industry and a standard would be either too restrictive or vague (i.e. a one- size fits all standard is not appropriate). 13 Foster Center for Private Equity
  14. 14. Typical positive comments include • “An industry-wide valuation standard would develop a level playing field, LPs with interests in a number of funds could properly evaluate performance of the fund and avoid having one fund value an investment at 100% and another at 50%, for ex. It would be nice to have one standard.” • “The very survival of the PE industry is dependent on waking up to the need for real and dependable uniformity in valuation.” • “An industry-wide valuation standard would put more pressure on private equity firms to honestly report on the financial condition and equity value of their portfolio companies.” 14 Foster Center for Private Equity
  15. 15. Typical negative comments include • “I assume that you are referring to standard valuation practices. I do not see significant benefit. In fact, it could serve to hurt returns, if sellers and their agents learn of such standardized valuation methodology.” • “MUCH prefer the way it is today ... industry thrives on the 'gray' of valuation … interim returns would be estimates, and poor predictors of long term value in portfolio, thus very harmful to GP” • “Don't see a benefit of industry wide standards, each firm would be well-advised to have their own process. If you don't know what it's worth, you shouldn't be in the business!” 15 Foster Center for Private Equity
  16. 16. Many firms report that an industry valuation standard is “important” or “very important” 38% 36% 27% 22% 9% 4% Insignificant Not Somewhat Important Very Important Important Important 16 Foster Center for Private Equity
  17. 17. Comparatively, more venture firms report that a standard is “important” or “very important” 41% 36% 38% 30% 33% 23% 22% 23% 8% 10% 3% 4% 1 2 3 4 5 1 2 3 4 5 Venture Firms Buyout Firms Scale: 1 = Insignificant to 5 = Very Important 17 Foster Center for Private Equity
  18. 18. Small venture firms place a higher importance on an industry valuation standard Venture Firms 60% 60% 60% 50% 41% 50% 44% 50% 45% 28% 28% 40% 40% 40% 33% 33% 30% 23% 30% 23% 30% 23% 23% 18% 20% 20% 20% 8% 10% 10% 2% 10% 5% 10% 5% 5% 0% 0% 0% 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Smaller Funds Mid Size Funds Larger Funds Last fund < $250M Last fund $251M - $750M Last fund > $750M Scale: 1 = Insignificant to 5 = Very Important 18 Foster Center for Private Equity
  19. 19. About one-third of buyout firms report that a standard is “important” or “very important” Buyout Firms 60% 60% 60% 50% 50% 50% 47% 39% 31% 42% 32% 34% 40% 40% 40% 30% 30% 26% 30% 25% 21% 21% 19% 19% 20% 20% 13% 20% 7% 10% 9% 10% 10% 10% 0% 0% 0% 0% 0% 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Smaller Funds Mid Size Funds Larger Funds Last fund < $250M Last fund $251M - $750M Last fund > $750M Scale: 1 = Insignificant to 5 = Very Important 19 Foster Center for Private Equity
  20. 20. Firms indicate that there will be real benefits if a standard is developed Improved LP Provide greater Improved calculation reporting industry of interim returns transparency 55% 55% 55% 46% 55% 43% 36% 45% 45% 45% 36% 35% 29% 35% 30% 35% 31% 26% 26% 25% 25% 18% 25% 13% 12% 10% 10% 15% 15% 15% 3% 5% 6% 5% 5% 5% -5% 1 2 3 4 5 -5% 1 2 3 4 5 -5% 1 2 3 4 5 Scale: 1 = Insignificant to 5 = Very Important 20 Foster Center for Private Equity
  21. 21. Both venture and buyout firms acknowledge that improved LP reporting will be a benefit 54% 57% 46% 42% 30% 28% 13% 12% 12% 11% 4% 2% 1 2 3 4 5 1 2 3 4 5 Venture Firms Buyout Firms Scale: 1 = Insignificant to 5 = Very Important 21 Foster Center for Private Equity
  22. 22. Venture and buyout firms also indicate that improved transparency will be a benefit 49% 42% 38% 32% 33% 29% 21% 17% 11% 9% 6% 4% 1 2 3 4 5 1 2 3 4 5 Venture Firms Buyout Firms Scale: 1 = Insignificant to 5 = Very Important 22 Foster Center for Private Equity
  23. 23. Firms indicate that there will be significant challenges to developing a standard Low likelihood of Difficulty in designing Concerns about the agreement among the components of confidentiality of individual industry players a single standard company valuations 55% 75% 55% 73% 55% 43% 41% 52% 45% 45% 45% 35% 32% 35% 32% 35% 29% 24% 23% 25% 18% 25% 19% 25% 20% 15% 15% 15% 6% 6% 3% 5% 0% 5% 1% 5% -5% 1 2 3 4 5 -5% 1 2 3 4 5 -5% 1 2 3 4 5 Scale: 1 = Insignificant to 5 = Very Important 23 Foster Center for Private Equity
  24. 24. Venture and buyout firms are both concerned with the low likelihood of agreement in the industry 76% 72% 43% 42% 33% 30% 21% 17% 6% 7% 0% 0% 1 2 3 4 5 1 2 3 4 5 Venture Firms Buyout Firms Scale: 1 = Insignificant to 5 = Very Important 24 Foster Center for Private Equity
  25. 25. However, large venture firms are particularly concerned with low likelihood of agreement Venture Firms 91% 76% 70% 55% 49% 41% 35% 36% 23% 21% 17% 7% 5% 5% 5% 1% 0% 0% 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Smaller Funds Mid Size Funds Larger Funds Last fund < $250M Last fund $251M - $750M Last fund > $750M Scale: 1 = Insignificant to 5 = Very Important 25 Foster Center for Private Equity
  26. 26. Firms are equally concerned with the difficulty of designing components of a single standard 74% 71% 41% 41% 33% 30% 18% 20% 8% 5% 2% 1% 1 2 3 4 5 1 2 3 4 5 Venture Firms Buyout Firms Scale: 1 = Insignificant to 5 = Very Important 26 Foster Center for Private Equity
  27. 27. However, larger venture firms are more concerned with difficulty in designing components of a single standard Venture Firms 83% 79% 73% 55% 51% 41% 32% 28% 27% 19% 15% 18% 2% 6% 3% 0% 0% 0% 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Smaller Funds Mid Size Funds Larger Funds Last fund < $250M Last fund $251M - $750M Last fund > $750M Scale: 1 = Insignificant to 5 = Very Important 27 Foster Center for Private Equity
  28. 28. Firms are concerned with the confidentiality of individual company valuations 50% 54% 33% 27% 27% 24% 23% 23% 17% 17% 3% 2% 1 2 3 4 5 1 2 3 4 5 Venture Firms Buyout Firms Scale: 1 = Insignificant to 5 = Very Important 28 Foster Center for Private Equity
  29. 29. Midsize buyout firms are especially concerned about the confidentiality of company valuations Buyout Firms 65% 48% 55% 47% 26% 26% 29% 25% 28% 28% 19% 19% 13% 16% 10% 6% 1% 0% 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Smaller Funds Mid Size Funds Larger Funds Last fund < $250M Last fund $251M - $750M Last fund > $750M Scale: 1 = Insignificant to 5 = Very Important 29 Foster Center for Private Equity
  30. 30. Venture firms are more likely to carry pre-IPO investments at cost with adjustments for subsequent financing events How firms report carrying pre-IPO investments Venture Buyout At cost with adjustments for subsequent 84% 50% financing events for significant deterioration At cost w/ no interim adjustments prior to 5% 13% exit Marked to market using public company 1% 9% comparables and illiquidity discounts Note: percentages do not add to 100% because some survey participants provided alternative answers or did not respond to the question 30 Foster Center for Private Equity
  31. 31. Venture firms are more likely to revalue a company when new outside financing occurs What events cause firms to revalue a portfolio company investment Venture Buyout New outside financing 89% 66% Missed milestones 55% 41% Major changes in relevant industry sector 46% 43% New strategic investor 45% 41% New inside financing 23% 23% Other, please specify 17% 17% Don't use cost method 3% 6% 31 Foster Center for Private Equity
  32. 32. Venture firms are more likely to revalue portfolio companies quarterly Venture Firms Buyout Firms 66% 43% 29% 9% 12% 5% 6% 1% Monthly Quarterly Semi- Annually Monthly Quarterly Semi- Annually Annually Annually Note: percentages do not add to 100% because some survey participants provided alternative answers or did not respond to the question 32 Foster Center for Private Equity
  33. 33. Venture firms are more aware of existing valuation standards Venture Firms Buyout Firms 57% 57% 41% 52% 41% 36% 21% 19% 12% 9% ANY NVCA EVCA BVCA ANY NVCA EVCA BVCA The proposed 1990 NVCA guideline is most the most widely known standard for US firms 33 Foster Center for Private Equity Any indicates either the NVCA, EVCA, BVCA or Other
  34. 34. Large venture firms are more aware of current standards compared to small venture firms Venture Firms 74% 68% 50% 74% 68% 68% 62% 50% 47% 38% 27% 27% 23% 16% 7% ANY NVCA EVCA BVCA ANY NVCA EVCA BVCA ANY NVCA EVCA BVCA Smaller Funds Mid Size Funds Larger Funds Last fund < $250M Last fund $251M - $750M Last fund > $750M 34 Foster Center for Private Equity Any indicates either the NVCA, EVCA, BVCA or Other
  35. 35. Venture firms are more likely to use existing standards as the basis for internal guidelines Venture Firms Buyout Firms 36% 36% 20% 33% 20% 16% 6% 8% 4% 2% ANY NVCA EVCA BVCA ANY NVCA EVCA BVCA The proposed 1990 NVCA guideline is most the most widely used standard for US firms 35 Foster Center for Private Equity Any indicates either the NVCA, EVCA, BVCA or Other
  36. 36. Midsize and large venture firms are more likely to use existing standards as the basis for internal guidelines Venture Firms 41% 41% 33% 41% 41% 36% 36% 33% 32% 10% 10% 9% 4% 3% 5% ANY NVCA EVCA BVCA ANY NVCA EVCA BVCA ANY NVCA EVCA BVCA Smaller Funds Mid Size Funds Larger Funds Last fund < $250M Last fund $251M - $750M Last fund > $750M 36 Foster Center for Private Equity Any indicates either the NVCA, EVCA, BVCA or Other
  37. 37. When aware of existing standards, venture firms are more likely to use them for internal guidelines Venture Firms Buyout Firms 63% 63% 63% 47% 47% 45% 42% 36% 27% 23% ANY NVCA EVCA BVCA ANY NVCA EVCA BVCA The proposed 1990 NVCA guideline is most the most widely used standard for US firms 37 Foster Center for Private Equity Any indicates either the NVCA, EVCA, BVCA or Other
  38. 38. Firms indicate that a PE industry association should lead the effort if a standard is developed 51% 14% 9% 5% 4% 2% 3% Note: percentages do not add to 100% because some survey participants provided alternative answers 38 Foster Center for Private Equity
  39. 39. PE Industry Association 55% LP Industry Association 13% Foster Center for Private Equity New PE Industry 6% Association Venture Firms Accounting Association 5% PE Industry 43% Association LP Industry 16% Association New PE Industry 13% Association Buyout Firms industry association should lead the effort Accounting 7% Association Both venture and buyout firms report that a PE 39
  40. 40. 46% of firms surveyed would like to be part of the process of creating industry standards 52% 46% 2% Yes No No Answer 40 Foster Center for Private Equity
  41. 41. Venture firms are more interested in being part of the process of creating an industry standard 54% 51% 47% 44% 2% 1% Yes No No Answer Yes No No Answer Venture Firms Buyout Firms 41 Foster Center for Private Equity
  42. 42. Acknowledgements • The survey questionnaire was developed by Professor Colin Blaydon with the assistance of Foster Center staff and Tuck Business School Students. • The analysis and presentation of the survey results were conducted by:  Professor Colin Blaydon  Professor Fred Wainwright  Professor Michael Horvath  Sean Ruhmann (Tuck Class of 2003) 42 Foster Center for Private Equity
  43. 43. About the Foster Center for Private Equity The Foster Center for Private Equity focuses on macro and micro issues relating to private equity: capital markets, financing structures, governance and entrepreneurship. It is actively involved in the practitioner communities of private equity, both to gain information about current trends and challenges and to share insights and solutions. The center interacts with institutional investors, venture capitalists, buy-out investors, corporate venturers, angel investors, entrepreneurs, portfolio companies, industry lawyers and accountants, industry associations, and the media. Through these outreach efforts, the center also promotes networking that facilitates the pursuit of venture-backed activities. A thought leader in the field of private equity, the Foster Center's work is represented in prestigious publications and industry conferences. The center is a regular contributor to the Venture Capital Journal, the leading industry magazine, and its directors are often sought out as authorities by top business publications, such as The Wall Street Journal. The center seeks to educate Tuck students in entrepreneurship and private equity investing through such courses as Private Equity Finance, Advanced Entrepreneurship, Field Studies in Private Equity and through supporting internships, fellowships and independent studies. For additional information on the Foster Center: http://mba.tuck.dartmouth.edu/pecenter/ 43 Foster Center for Private Equity

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