The “buy now, pay later” company said it raised $800 million in fresh funding from investors at a valuation worth $6.7 billion. This figure comes in significantly below the $45.6 billion value secured by Klarna in a 2021 cash injection led by Japan’s SoftBank.
The news of Klarna’s valuation drop comes after weeks of speculation that the firm has been seeking a so-called down round. This is where a privately-valued firm raises capital at a valuation lower than when it last sold new shares to investors.
“During the steepest drop in global stock markets in over fifty years, investors recognised our strong position and continued progress in revolutionising the retail banking industry,” commented Klarna CEO Sebastian Siemiatkowski.
Klarna reportedly plans to use the funding to push on with its expansion into the United States, where the firm already has around 30 million users.
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What does a typical valuation analysis of a company consist of?
Most of our work is referred to us by attorneys and accountants. We provide valuation opinions to publicly traded and private companies that are pursuing a merger, acquisition, divestiture, recapitalisation, wealth transfer, business dispute, or any number of other reasons where a value opinion is needed.
The valuation of any business is a complicated assignment, and every project is different. There are many characteristics of this work that I truly enjoy. For starters, it requires the analyst to fully understand the nature of a company, its history, and the industry. We look to grasp where the company is headed by way of projections of revenues, expenses and cash flow. We then perform a thorough analysis of the market, including analyses of both public companies that operate in the same industry as well as prior transactions of similar, private and public companies. Our industry standards require that we consider multiple approaches to each valuation analysis – the three generally considered valuation approaches are the cost approach, the income approach, and the market approach. The goal is to have a triangulation of value among the three approaches, but every company and every transaction is unique, and we treat them as such.
Please explain a fairness opinion and solvency opinion and why a company would need one.
Fairness opinions and solvency opinions are typically requested by those with a fiduciary responsibility to their noncontrolling shareholders or members, e.g., a board of directors. Both opinions assist the board with its decision to approve or not approve a transaction by providing them with an independent analysis of the transaction. Should the decision ever be challenged in court, our opinion helps protect the board by showing that a third-party adviser provided unbiased insight. Fairness opinions and solvency opinions are recommended for both private and public company transactions.
For a fairness opinion, our role is to determine if a potential transaction is fair, from a financial point of view, to a particular party. If the transaction is for an acquisition – that party could be either the seller or the buyer. From the sell side, we ensure that the price being paid is not too low and, from the buy-side, we ensure that the price being paid is not too high. The fairness analysis requires that we value the subject company and compare that value to the consideration being paid. We experienced a great increase in SPAC/de-SPAC fairness opinions in 2021, where we were asked to determine if the merger with the SPAC target was fair to the SPAC investors from the buy-side perspective. We expect this type of work to significantly increase over the next 12 months.
For a solvency opinion, we determine if the recapitalisation event or the raising of the company’s debt will drive the company into an insolvent position. We opine on the three tests of solvency, namely that the company is solvent from a balance sheet perspective, in addition to ensuring that the company can continue to pay its expenses and debts as they come due and that it also has adequate capital reserves in case of a business downturn. Our solvency opinion work has significantly increased since 2020 as dividend recapitalisation transactions by private equity investors have been on an upswing.
Fairness opinions and solvency opinions are similar to a typical business valuation in terms of approach, but fairness and solvency analyses require additional detail, rigor and research given the risk profile of the assignment. For that reason, my team of professionals who lead these analyses have decades of valuation and transaction consulting experience.
How do you differentiate your services from your competitors?
We provide fully independent fairness opinions and solvency opinions. I stress "independent” because our fees are not contingent upon whether the transaction closes, nor contingent on the size of the transaction. We work on a fixed fee basis for all fairness opinion and solvency opinion work. This compares to some firms that offer contingent based, investment banking services or advisory services and a fairness opinion for the same transaction. However, we believe that doing so is an inherent conflict of interest because of the simple reason that if the transaction does not close, they do not get paid. Plain and simple – they are fully motivated to opine that a deal is deemed fair or that a company will remain solvent post transaction.
We also believe that our transaction opinion review process is second to none. The project team is typically led by a very experienced managing director. Their work is then reviewed by senior members of the firm, including myself. Finally, the analyses and opinions are presented to our internal committee – which consists of four executive board members of our firm. The committee includes our Chairman, a seasoned corporate attorney; our Vice Chairman, retired ‘Big 4’ audit partner; our President and CEO; and the leader of our national Financial Valuation and Consulting practice. Every one of our fairness opinions and solvency opinions must pass their scrutiny before we take it to our clients.
What are the key complexities that can arise during the process?
One of the biggest issues that we run into – especially with solvency opinions – is when the company is viewed differently from a day-to-day operational perspective as compared to its legal structure. For instance, advising counsel will typically want a solvency opinion at each step of the transaction, i.e., from where the debt flows in, to where any cash flows out. If a company has a complicated legal structure, the debt may flow in very low on the ownership chain, and not in an entity that is typically viewed on its own, standalone perspective.
Other complexities include fairness opinion assignments that require the valuation of the equity of entities on both sides of the transaction or rollup transactions (e.g., up-REIT transactions) that require the valuation of equity in multiple funds or entities being consolidated. Some transactions require that we determine values for underlying assets such as investments in real estate. For these assignments, we have a robust in-house real estate valuation practice that plays a key role.
How do you resolve them?
We understand that many of our clients do not have experience with valuation concepts, fairness opinions or solvency opinions – so we educate them along the way and work through the challenges. Sometimes this means brainstorming with their counsel and other advisers on new ways to solve a problem. Each transaction is unique and that is what makes our work challenging and exciting! We enjoy being a resource to our clients and earning the opportunity to be their trusted advisers.
Copenhagen-based company card start-up Pleo has raised $150 million in a financing round, which was led by Thrive Capital and Bain Capital Ventures. Pleo has said that the round, which is now the largest Series C for Danish startups, has led to the company being valued at $1.7 billion.
Pleo, which sells corporate expense management software and linked smart payments cards, has increased its valuation to $1.7 billion following a $150 million financing round, led by Thrive Capital and Bain Capital Ventures. Following its recent valuation, Pleo is now the latest European fintech firm to reach “unicorn” status.
Around 70% of Pleo’s profit comes from interchange fees from merchant bank accounts, subtracted each time a customer uses their card. Paid subscriptions are Pleo’s second largest form of revenue. The start-up has said that the coronavirus pandemic has served as an accelerator for its business model. Over the course of 2020, Pleo’s customer base doubled to 17,000 as an increase in remote working offset a decline in international business travel.
Pleo’s founders were previously employed by Tradeshift, a $1.1 billion fintech company that relocated from Copenhagen to San Francisco. Moving forward, Pleo’s founders plan to use fresh funds to increase the company’s presence in countries like the United Kingdom and boost marketing and PR.
According to new data compiled by AksjeBloggen, the world’s ten largest unicorn companies reached a collective valuation of $563.3 billion as of September 2020.
Topping the list was the Chinese fintech Ant Financial, with a valuation of around $150 billion. The company, which offers clients a range of financial services from lending and payments to investing and insurance using a platform business model, recorded revenue of $10.5 billion in the first half of 2020 – a 38% increase year-on-year, with a net profit that rose almost 11 times to £3.26 billion during the same period.
Ant Group filed for its hotly anticipated IPO in August, and will be listed on both the Hong Kong Stock Exchange and Shanghai’s STAR Market.
ByteDance ranked as the second-most-valued unicorn. The parent company of Chinese social media giant TikTok gained a valuation of $140 billion as of September, representing an increase of 86% from the start of 2020.
Didi Chuxing, another Chinese company, ranked third among global unicorns with a $62 billion market value. An app-based transportation service provider with over 550 million users, the company facilitates ride-sharing, bike-sharing and taxi-hailing services, among numerous others.
US unicorns Infor and SpaceX rounded off the list of the top five global unicorns with respective valuations of $60 billion and %46 billion. America represented the largest unicorn market in the world, according to CBInsights data, with 236 private companies valued at over $1 billion. China ranked second with 182.
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When the term “unicorn company” first came into usage in 2013, there were only 40 private companies in the world that held a valuation of over $1 billion. Now there are 12.5 times as many unicorns currently in business, with around 500 existing as of September this year.
73 new unicorns were minted in 2020. Taken together, the world’s unicorns are worth a collective $1.5 trillion as of September. A full third of currently operating unicorns are involved in the fintech sector.
Sweden-based payment and shopping service Klarna has completed its latest equity funding round, raising $650 million and achieving a valuation of $10.65 billion – cementing it as the highest-valued private fintech company in Europe.
The funding round was led by Silver Lake Partners, Singapore’s sovereign wealth fund GIC, and funds managed by HMI Capital and BlackRock. Other current investors include Dragoneer, Bestseller, Sequoia Capital and Commonwealth Bank of Australia.
Klarna has announced its intention to use the funding to invest in its shopping service and expand its global presence, singling out the US as an opportunity for growth. The company already has more than 9 million customers in the US, and 90 million worldwide.
Founded in 2005, Klarna offers an app-based service allowing users to shop online and pay in interest-free instalments while Klarna pays the seller. It competes with other high-profile fintechs including Revolut and Checkout.
Klarna co-founder and CEO Sebastian Siemiatkowski said in the deal announcement that the company was at “a true inflection point in both retail and finance.”
“The shift to online retail is now truly supercharged and there is a very tangible change in the behaviour of consumers who are now actively seeking services which offer convenience, flexibility and control in how they pay and an overall superior shopping experience,” he said.
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Silver Lake heads Egon Durban and Jonathan Durham hailed Klarna’s business model in a joint statement. “Klarna is one of the most disruptive and promising fintech companies in the world, redefining the eCommerce experience for millions of consumers and global retailers, just as eCommerce growth is accelerating worldwide and rapidly shifting to mobile,” they said.
Klarna’s last funding round was completed in August 2019, raising $460 million and earning the company a $5.5 billion valuation. The company has surged in strength during 2020, as Siemiatkowski claimed in August that the value of transactions processed through its platform increased by 44% through the first six months of the year.
British pharmaceutical giant GSK will purchase a 10% stake in CureVac, a leading German biotech company working to create a vaccine against the COVID-19 virus, the two companies announced on Monday. GSK’s purchase will come to £130 million, or $163 million. An upfront payment of £04 million will be issued, followed by a one-time reimbursable payment of £26 million for manufacturing capacity reservation.
As part of the deal, both companies will collaborate on “the research, development, manufacturing and commercialisation of up to five mRNA-based vaccines and nonoclonal antibodies” to combat infectious diseases, according to the release. However, CureVac’s existing COVID-19 mRNA and rabies vaccines research programmes will not be included in its collaboration with GSK.
Earlier this month, CureVac was granted a €75 million loan by the European Investment Bank to fund the development and production of a COVID-19 vaccine, coming on top of a €300 million investment from the German government in June (taking a 23% stake in the company).
A Tübingen-based company, CureVac gained international attention in March after reports emerged that the Trump administration had issued a substantial offer of funding to the firm in return for its relocation to the US and exclusive rights to its eventual COVID-19 vaccine. CureVac denied that such a bid had been made.
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CureVac plans a stock market listing in September or October, and is likely to receive a high valuation due to its investments from GSK and others.
“We are delighted to partner with GSK,” said Dr Franz-Werner Haas, CureVac’s acting CEO. “With this collaboration, we are gaining a world-class partner whose expertise and global footprint will allow us to further develop and translate the value of our platform into potential products for the world.”
Roger Connor, President of GSK Vaccines, also commended the deal. “GSK’s self-amplifying mRNA (SAM) vaccine technology has shown us the potential of mRNA technology to advance the science of vaccine development, and CureVac’s experience complements our own expertise. Through the application of mRNA technology, including SAM, we hope to be able to develop and scale up advanced vaccines and therapies to treat and prevent infectious diseases quicker than ever before,” he said.
This valuation should easily create the world’s most valuable listed company, and reports indicate it will achieve this through the sale of a 1.5% stake in three billion shares. This is just short of market analyst predictions for 2% of the company to be sold off to the public.
The IPO’s targets specify between $24bn and $25.6bn is to be raised for the Saudi government to diversify into other revenue channels beside oil, specifically growth in tourism.
The valuation could have bene higher, but the official investment prospectus detailed some risks ahead, causing concern among investors.
According to Sky News, Jasper Lawler, head of research at London Capital Group, said of the flotation: "The valuation is short of the $2trn value sought by [the] Saudi Crown Prince.
"Foreign investors just weren't willing to pay up to give MbS (Mohammed bin Salman) his blockbuster.
"A valuation above $1.5trn seems to be where foreign demand dried up so under current plans, shares will be taken up by mostly domestic investors.
"Assuming the IPO moves ahead at this price range, it will succeed at the goal of raising funds for Saudi Arabia to diversify away from oil.
"It won't be the big draw of outside money into Saudi Arabia that it could have been."
Nik Storonsky, the CEO and Founder of Revolut confirmed this during an exclusive interview with LearnBonds.com.
During the interview, Mr. Storonsky talked about the challenges that Revolut is currently facing. He explained that Revolut is working to find the best candidates to join the firm and meet the current growth needs.
“Each market that we enter also presents us with new and interesting hurdles, so expansion and adapting to new markets is another exciting challenge,” he said.
Revolut has been expanding since 2015 when it was released to the market. Since that time, the firm became a new competitor to banks and traditional financial institutions. As the demand for new financial products and services continues to grow, Revolut’s valuation follows the same path.
In just a few years, if the company maintains its growth rates, Revolut could surpass the $10 billion valuation.
“I think it will happen at some point, and we hope that in time we’ll exceed a $10 billion valuation. It would be hard to pinpoint when we might reach that number, but I expect that it may be within the next few years,” Mr. Storonsky told LearnBonds.
He went on saying that they are not focused on being the most valuable fintech firm, but they want to offer customers around the world, the best possible financial experience.
Nik explained Revolut is building robust governance procedures to cope with their growing customer demand. In the past few months, the firm appointed several experts in different areas to strengthen their management team.
Regarding the future of the company, Storonsky stated they will continue to hire great people around the world and expand to new regions and markets. Moreover, they are also working in order to ensure that customers receive the best financial services experience.
In addition to it, the challenger bank is working so as to maintain their exponential growth and move towards profitability.
The CEO and Founder of Revolut ended the conversation by talking about the interaction between traditional and challenger banks.
On this subject, he explained: “Many traditional banks around the world are failing by not offering effective technology platforms, not integrating customer data properly for better suggestions and failing to serve customers with enough machine-learning intelligence embedded in their process.”
According to LearnBonds, a $10 billion valuation could potentially place Revolut among the top 100 lists of banks by market capitalization.
Barclays Pcl, for example, is currently the 64th largest bank with $28 billion market cap. Meanwhile, the banking giant HSBC Holding is in the 7th position with a market valuation of $144 billion.
At the same time, Barclays was able to make $2.8 billion last year. If Revolut wants to have a $10 billion valuation it would have to make $1 billion per year. Currently, Revolut is still an unprofitable company.
Finance Monthly speaks with Dan Peters, the Managing Partner of Valentiam Group – a firm focused on transfer pricing and valuation that spun out of Economics Partners in 2018. Dan has practiced transfer pricing and tax valuation for over 25 years, and previously led global practices at KPMG and Duff & Phelps.
Valentiam currently has 7 Partners and about 20 professionals in the company’s offices in New York, Dallas, Salt Lake City, Los Angeles, Seattle and West Palm Beach.
The firm serves clients from the middle-market to the largest and most complex multinational firms and focuses exclusively on transfer pricing and valuation matters, which are primarily for tax purposes – such as property tax valuation, valuation of legal entities within a related-party group structure, or valuing specific intangible assets.
All of the firm’s Partners are leaders in their specialties and Legal Media Group lists each of Valentiam’s transfer pricing Partners as ‘Leading US Transfer Pricing Advisers’.
Below, Dan tells us more about the work they do and the things that set them apart from other tax advisories.
Tell us about the beginnings of Valentiam Group? What inspired the founding of the company?
Valentiam Group’s origins date back to when I started my own practice in 2009. We ultimately entered into a collaboration with Economics Partners in 2013. EP later sought and found a transaction to be acquired by Ryan and Company, which was finalised last year.
Everyone from my original team and several of the other Partners that have been with us for many years weren’t interested in that transaction, so we decided to establish an independent firm focusing on our specialties. So we tried to create Valentiam as a perfect platform for 2019, rather than 1919.
So we tried to create Valentiam as a perfect platform for 2019, rather than 1919.
What was the process of creating the new brand like? How did your clients react to the new brand?
Creating Valentiam in 2018 was a lot different than starting my own firm a decade ago. We used ‘crowdsourcing’ to help us choose a name, design a logo, and develop our website. It was astonishing to see how radically different and better that process can be when you use technology.
Our clients have been incredibly loyal to us. My experience in our industry is that clients are primarily focused on the quality of the adviser and the work product that they produce. None of that changed with us when we rebranded as Valentiam and the transition has been as smooth as we could have hoped it will be. In fact, our clients are as excited as we are about the new platform and what it means for them.
What are the company’s overall principles, beliefs and mission?
Our mantra is that the firm’s purpose is to support our advisers and clients. There are three actors in our business – the advisers, the firm, and the clients. We fundamentally believe that way too much of the value in other platforms is attributed to the firm.
The typical firm ends up bloated – with Senior Partners acting as administrators and the overhead part of the firm unnecessarily consuming resources that should be invested in serving clients in a better way or paid to the advisers. All this drives up costs and thus, prices for clients, and results in the actual advisers earning only a small fraction of what is billed to the clients. This is why our core principle is that our primary focus should be on serving clients and developing our team of advisers.
Our other mission is to be an independent provider of transfer pricing and valuation services, as we understand the synergies and complexities between them and we see the value in being independent.
Combined, these differentiators allow us to reward and grow our top performers’ careers, providing our clients with better advice and fairer billing rates.
What makes Valentiam Group a different platform for both clients and professionals that practice transfer pricing and valuation?
Our platform is optimal for both our clients and our professionals for three reasons. First, we are extremely low overhead. We have no Partners who are administrators – actually we don’t have administrators at all. I spend the great majority of my time advising clients. We either outsource administrative functions or leverage technology to perform the routine functions of a professional services firm.
Second, all of our professionals share in the success of the firm as our compensation model has more risk and reward than what the industry typically offers. That helps align the incentives of all of our professionals to be focused on serving the client.
Third, we have a much flatter structure than our competition – it’s really an ‘apprentice model’, where our young professionals work directly with Directors and Partners. Our staff/Partners ratio is roughly 1.5 to 1 - compared to leverage ratios of about 8 to 1 in big accounting firms.
Combined, these differentiators allow us to reward and grow our top performers’ careers, providing our clients with better advice and fairer billing rates. It also allows our Partners and younger professionals to work closely together in the trenches on client matters, which is satisfying for both sides.
How do you best help companies set their transfer prices and manage their transfer pricing risks?
Setting transfer prices is by definition subjective, and we sometimes say that we are only limited by our imagination in thinking of how third parties would transact with one another.
But in today’s world, the transfer pricing risks that our clients face – which obviously include tax risk, but also reputational risks and even the risk of disruptions to operations – as a result of inappropriate transfer pricing are so great that we have to be extremely careful to ensure that the advice we give to our clients is absolutely correct and defensible.
We can’t be certain that what was acceptable in the past will be so in the future. Our clients need to be sure that the economics of what we do are sensible. The best way we’ve found to do that is to ask: “Would both parties agree to this price or value?”. We make sure that our analysis holds up for both the buyer and the seller.
What makes your property tax advisory business unique?
Carl Hoemke, who leads that practice for us, has been an innovator in the property tax space throughout his career and has developed property tax compliance software that is market-leading. He focuses on valuing complex assets for the largest companies who have the highest property assessments.
Carl is planning to make us the key player in the complex property tax valuation area - we’re going to do some exciting things in the next 12 months!
Setting transfer prices is by definition subjective, and we sometimes say that we are only limited by our imagination in thinking of how third parties would transact with one another.
Why do you focus on valuation for tax purposes?
Tax Valuations require the practitioner to understand tax. We see tax valuation studies that are fundamentally wrong because the adviser didn’t understand the purpose of the transaction, or the risk profile of the entity within a larger group. Since we focus exclusively on tax matters, we believe we do this work better than other firms.
What are the synergies between transfer pricing and tax valuation?
It starts with the skillsets of the advisers. The training, databases, methodologies used – there are more similarities than differences in the skills required to perform a valuation study and a transfer pricing study.
It then extends to the issues we face – one can’t be a complete transfer pricing adviser without being able to value assets, and you can’t really do solid tax valuation studies without being expert in transfer pricing.
We believe that our approach to addressing these two services in a single practice gives us a competitive advantage in attracting young professionals to our practice and in providing our tax clients with the most expert service possible.
To hear about valuation services in the US, Finance Monthly speaks to Gregg Dight, ASA, Senior Appraiser for Ohio-based Equipment Appraisal Services (EAS). Working from a satellite office in Redding, Connecticut, Gregg has been with EAS for 3½ years and in addition to his work in the US, he’s also completed appraisal assignments through the UK, Western Europe, Mexico, Puerto Rico and the Dominican Republic. Below, he discusses the appraisals that his company works on and offers his insights into the world of valuations.
What are the types of appraisal that you offer?
We provide machinery and equipment appraisals across all industries and markets for banks, leasing and finance companies, insurance, end-user business or asset acquisitions (purchase and sale), accounting purposes, and litigation support within all these markets, involving collateral review, business disputes, bankruptcy, casualties, liability issues, divorce, donations, property tax, and investment risk management.
At EAS, approximately 50% of the work I do involves some level of litigation or potential for legal intervention. In many of these engagements, I am directly hired by one of the law firms involved with the case.
What does a typical valuation process involve?
The process begins with an in-depth client discussion to better understand the overall scope and purpose of the appraisal within their larger project. Gaining a ‘big picture’ perspective allows us to assist the client in defining the appropriate approach to take within the valuation scope that best fits their project needs. For example, definition/premise of value and effective date.
We then review the specific assets involved and discuss the importance or relevance of completing an on-site inspection of the facility and associated equipment as part of the scope. We typically suggest a physical inspection as part of the process, however, in certain instances this may not be feasible or critical, and we therefore, complete a desktop analysis based on the data provided to us from the client.
Once the scope is fully defined, we estimate a fee level for the client, enter an engagement agreement and complete the work within an efficient time frame, usually 10-15 business days, depending on the size of the project.
Field work involves meeting with company personnel familiar with the assets to gain an understanding of the business operation and specifics of the underlying machinery and equipment pertinent to the appraisal. The research and analysis is then completed through searches of similar assets in the used and new equipment marketplace, both recently sold or available on the market, and discussions with manufacturers and dealers in the new and secondary markets, ultimately arriving at an appraised value that best fits the subject machines valued.
Certain assets have more market information available to review than others, and we therefore determine how much reliability there is to the market data while complementing the research with variables such as the normal useful life, effective age, typical physical deterioration levels and obsolescence (usually technology related) of the equipment. These two approaches are referred to as the ‘Sales Comparison Approach’ and the ‘Cost Approach’. There is a third approach called the ‘Income Approach’ to value involving discounted cash flows and review of related internal financial data, however, this approach is used primarily in the overall business valuation of a company as opposed to the appraisal of individual assets. We can, however, complete a Fair Rental Value analysis on specific assets, which estimates current and future equipment values along with market lease rates.
The final deliverable product to our clients is a narrative report summarising the work with a detailed appendix of equipment descriptions and associated values. These values may be defined under ‘Fair Market’, ‘Liquidation’ or ‘Fair Value’ premises depending on the needs of the client. Photographs and industry data is also included in the final product.
To what level do you guarantee the accuracy of the valuations you provide?
Given there is always a degree of subjectivity to any appraisal, and reliance on external data not identical to the subject assets being appraised, there is no guarantee behind an appraiser’s values. We state in our reports that an appraisal is an estimation of value based on the data provided and researched, so there is no ability to guarantee the equipment will ultimately sell for any exact amount. The variables involved with the actual sale of an asset can be quite different from the appraisal’s assumptions at the time of the valuation.
I am an ASA (American Society of Appraisers) Senior Accredited Appraiser which carries a high degree of experience and reliability behind it. We are governed under the Uniform Standards of Professional Appraisal Practice (USPAP) and we state that the work undertaken is thorough and reasonable for the assignment. If you ask three appraisers to value the same group of assets at the same time under the same premise and scope, it is entirely possible they will arrive at three different conclusions. The hope is they will be within a reasonable range of each other (+/- 10-20%), however, this is not always the case. This is where the subjectivity level of the final conclusion comes into play and the reason why appraisers can be on opposite sides of a legal case or business transaction, while being required to explain their findings in an effort to prove the reliability of their work.
This ASA accreditation and associated experience is critical if the client needs a formal, reliable valuation that will hold up to any level of scrutiny.
How important are your valuation opinions to lenders and investors, when they are considering a transaction? Are they able to override your opinion?
The importance of any appraisal is ultimately determined by the users of the report and their overlapping case or project involved. Typically, the appraisal is one part of a larger business deal or legal case which will assist in establishing a value perspective within the framework of a larger transaction. As examples, in an equipment investment approval, the pricing, profitability and credit rating of the client’s customer will factor in as much or more than the collateral value of the assets. In legal cases, establishing and proving liability is often the most important factor in a case. Once that is decided, the damages portion of the dispute will involve a review of the appraisal.
Which sectors do you work with most? How do you overcome the problems presented by working with a number of different sectors?
Being a ‘Generalist’ in the machinery and equipment appraisal world is common as there is simply not enough work for a valuation firm within a single industry. There are appraisers who specialise in certain markets, however, they usually have a resale component to their business that supports the revenue of the company.
A typical year of valuation work in my present capacity will cross into construction/contracting equipment, transportation, including truck/tractor, rail, and marine, manufacturing equipment of all kinds including machine tool production and packaging, mining operations, material handling, infrastructure of various kinds, high tech, including IT and semiconductor, medical equipment, and general personal property (office and warehouse furniture fixtures and equipment (FF&E). I do my best to become more versed in these markets during the course of the engagement by getting current in the industry and the equipment available. In today’s climate, data is more accessible to be able to learn what you need to quickly and efficiently. After 34 years of working across multiple industries, I have retained enough of the key factors involved in most of these markets to minimise the time it takes to bring myself up to speed.
Phone: (203)-644-0006
Email: gregg@equipmentappraisal.com
Website: http://www.equipmentappraisal.com
John Mackris, MAI, MRICS is an Executive Director within the Valuation & Advisory (V&A) group of Cushman & Wakefield Inc., a full-service worldwide real estate company with over 43,000 employees. Cushman & Wakefield’s V&A group provides advice on real estate equity and debt decisions to clients on a worldwide scale and comprises 1,670 professionals located in more than 130 offices in 30 countries worldwide. The group’s capabilities span valuation and advisory services relating to acquisition, disposition, financing, litigation, and financial reporting, and 18 practice groups deliver real estate strategies and solutions to clients with unique operational, technical and business requirements. Mr. Mackris is also a Midwest Region Leader within C&W’s Retail Industry specialty group.
How would you currently describe the US real estate appraisal industry and what shifts do you expect throughout 2017?
The US real estate industry has been evolving at an accelerating pace over recent years due to advancing technology and better equipped professionals. Access to an extensive level of market information at the appraiser’s finger tips combined with more sophisticated software to analyse this information has resulted in much more credible and supportable valuations. While the number of US-based appraisers has declined by about 2.5 percent per year over the last decade, the number of appraisals has increased, as appraisers have become more efficient. Over the next five to 10 years, this trend of fewer appraisers is anticipated to continue due to retirements, fewer new people entering the appraisal profession, economic factors, and increasing government regulation. The question is whether the rate of appraiser efficiency can continue; if not, expect appraisal fees and turnaround times to rise.
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Specific to 2017, appraisers will need to be cognizant of the Trump administration’s new tax and deregulation policies, and how they will impact various types of real estate in different geographic locations. Most investors are anticipating lower corporate and personal income taxes, but potentially higher border import taxes. The implications of tax policy combined with deregulation will potentially have a varied approach across the US real estate market. Real estate in import-oriented areas might suffer, while areas with heavy manufacturing geared to domestic consumption will benefit. Overall, most economists are anticipating strong economic growth compared to the Obama years, where GDP growth hovered in the 1.0 to 2.0 percent range. If GDP growth reaches the 3.0 to 4.0 percent level, appraisers can anticipate significant changes in almost all property types, with new development and adaptive re-use becoming an increasing part of the assignment log. Strong economic growth, however, will also bring interest rate hikes from the Fed, which would push borrowing costs upwards and change investor purchasing assumptions. The key for appraisers in 2017, and more so than in years past, will be constant market research and understanding the factors that are driving each transaction.
What would you say are the biggest challenges facing real estate appraisal companies in the US?
There are many challenges facing appraisal companies, such as finding and retaining good employees, or staying compliant with an ever-growing barrage of governmental regulations, but these are not new to the industry. What has changed over the last decade is the need to incorporate more technology into the process and balance this against an overreliance on technology. Appraisal has often been described as a combination of science and art, with “art” being a synonym for common sense and experience. While the next generation of appraisers, or “millennials,” bring a strong technical skillset to the field, the key for this generation will be whether they can transition back to the basics of primary research. In laymen terms, this means picking up the phone and talking to market participants rather than simply searching on Google. With an ever-aging base of appraisers, this transition will be critical to good quality valuations in the years to come.
Do you foresee the need for legislative change in the near future, if so why?
Yes, there is a strong need for legislative change in the near future. The appraisal process has become more costly, more complicated, and less productive due to out-dated regulations. The federal regulatory structure for real estate appraisals (FIRREA) has not changed since 1989. As a result, appraisers have to deal with a layering effect of rules and regulations that discourages new people from entering the field, while also decreasing appraiser profitability. As an example, the industry has seen several new, time-consuming regulations pertaining to the role many senior appraisers conduct as a supervisor-appraiser to a trainee-appraiser. In discussing these new regulations with my peers, many have elected to drop plans they had for new hiring as they felt the time, cost, and effort of staying compliant were not worth the benefits afforded by the new hire. The Appraisal Institute is fighting to reduce the number of regulations, but it will take time to reverse the increased regulatory trend over the last decade.
In your opinion, what would be the best approach to modernize the US appraisal regulatory structure?
Often times, appraisers work in multiple states. This is common among appraisers who reside near their state border, and appraisers that specialize in unique property types, in which their expertise is in demand across a wider geographic area. As an appraiser based in Chicago, I often complete assignments in the nearby states of Wisconsin and Indiana. And as a specialist in retail shopping centers, I cover a territory which comprises the entire Midwest region of the US consisting of nine states. Needless to say, completing each state’s licensing regulations can be time consuming. What makes this process frustrating, however, is that these states all have slightly different requirements for education, reporting, application dates, and regulatory fees. While they all share the same goal of ensuring the integrity and professionalism of appraisers within their states, their varied regulations add unnecessary burdens on industry professionals. A simple solution would be if each state could outsource its regulation to a single interagency firm and provide a multi-state license. Or, at a bare minimum, each state should try and synchronize its regulations with the neighbouring states.
In your role, what are the main challenges you encounter and how do you work alongside your clients to overcome these?
An appraisal assignment contains many steps in a process, with the finished product comprising the final appraisal report. The first step is gathering property-specific information, such as rent rolls, leases, operating statements, etc. Gathering this information from the property contact as soon as the assignment is engaged is critical to an on-time delivery, as often times it may take the property contact several days to gather and deliver these items. Once delivered, the appraiser can then commence his or her analysis. The initial receipt of this information can often open up a need for additional items, which can then add pressure to the promised delivery date. Over the years, I have found that effective communication with my clients regarding the nuances of the property and what property-specific information is needed can effectively eliminate the need for deadline extensions. Some clients have realized that they can facilitate the process by informing their borrowers of what items will be needed prior to appraiser engagement, which can eliminate days of waiting.
Looking at the work of your peers, and in your past experience, how would you say the role of a real estate appraiser has changed over the past 20 years?
Surprisingly, the role of appraisers over the past 20 years has stayed the same more than it has changed. The market still looks to appraisers for the insight, expertise, knowledge, and unbiased view of market value. While technology has changed the process of appraising, the appraisers’ role, fortunately, has not changed. If appraisers are true to their mission, they can offer market participants an impartial view a property’s value, and the state of the micro- and macro-market in which it is situated. In an environment often tainted by varied interests, nothing can be more valuable than a real professional’s unbiased opinion.
By Aaron Kibbey, Robert Rasor & Brian Bostwick
Whether in court or out of court, in most restructuring situations involving stakeholders with various claims to a Company’s assets, the valuation of these assets is a critical component. In restructurings involving oil and gas reserves, the valuation analyses are often more complex because of the technical data and skillset required to value these reserves.
In the recent Sabine Oil & Gas and Energy XXI cases, stakeholders clashed over competing interests, and claims hinged on very different views of the value of the respective companies’ assets. These cases highlight the importance of retaining professionals who fully understand the technical aspects of performing a valuation analysis on oil and gas assets, and who can also apply their experience in valuing these types of assets in order to tailor their assumptions and inputs to the unique characteristics of the specific assets associated with the restructuring. In the Energy XXI case, Loughlin Management Partners + Company (“LM+Co”), a boutique restructuring advisory firm based in New York, partnered with HJ Gruy and Associates, Inc. (“Gruy”) a petroleum engineering firm based in Houston, to provide a comprehensive valuation analysis on a specifically targeted portion of the Company. This article outlines the general approach LM+Co and Gruy applied in their analysis, and also suggests several important considerations for teams attempting to value oil and gas assets.
Although valuing oil and gas assets is not necessarily more difficult than valuing other asset classes, valuing these types of assets requires a detailed understanding of the relative merits of traditional valuation methods. Valuing oil and gas assets, which comprise a depleting asset base where value is correlated to constantly changing commodity prices and historical production trends, demands a thorough understanding of the technical details included in a company’s reserve database. Although commodity prices fluctuate, the value estimates of the underlying oil and gas assets should be based on current conditions, and are not intended to reflect unforeseeable economic or environmental events that could alter the fair market value subsequent to the valuation date.
The Market Approach and Income Approach
When estimating the value of a company or a group of assets, both a Market Approach and an Income Approach should be employed, and this holds true when estimating the value of oil and gas assets. A Market Approach, such as a Comparable Company Analysis or Precedent Transaction Analysis, provides the relative value of the target assets based on how investors price similar assets. The Market Approach provides an estimate of value based on external information of the subject company, specifically how investors view the value of similar assets. An Income Approach, such as a Discounted Cash Flow (“DCF”) Analysis or, specifically when valuing oil and gas assets, a Net Asset Value (“NAV”) Analysis, provides an estimate of value based on internal information from the company, specifically the projected cash flows attributable to the target assets. It is key to recognize, when utilizing any of these methodologies, that there are relative merits and limitations associated with each, and these merits and limitations are magnified by the financial detail available in each unique situation.
The most common and widely accepted method to value an oil and gas company is a Net Asset Value Analysis, and nearly every valuation estimate for oil and gas assets will include a NAV analysis. However, relying solely on the results of a NAV analysis leaves the estimate of value susceptible to some potential shortcomings of this method. Although a NAV is essentially a very detailed DCF Analysis which includes very specific information on the selected oil and gas reserves, all of the other methods mentioned above should be considered and evaluated when performing a valuation analysis on oil and gas assets. The quality of the data available will ultimately dictate which methods to use and the appropriate weighting of each method.
A Market Approach provides an estimate of value based on how investors price similar assets by using a multiple on a common metric. Although sales, free cash flow, and EBITDA are commonly used metrics in this approach, the metric need only be observable, not necessarily financial. Care needs to be exercised when selecting the metric for a Market Approach valuation.
Comparable Company Analysis
A Comparable Company Analysis looks at publicly-traded, comparable companies and calculates a valuation using multiples of financial data based on the Total Enterprise Value (“TEV”, the combined value of the equity and the debt, net the cash on the balance sheet) of the chosen comparable companies. This approach provides the public market view on the value of similar companies or assets, but may be limited by the subjectivity inherent in trying to determine the relative similarity of the “comparable companies”. Comparable Company Analysis is recognized and well received by the US Bankruptcy courts. Two notable recent cases that included this method were Penn Virginia[i] and Swift Energy[ii].
When using the Comparable Companies approach, the selection of the comparable companies is critical. Finding companies that are similar or nearly identical would be ideal when applying this approach; however, it is typically very difficult to find such companies. An important consideration when using a comparable company valuation analysis is that a comparable firm need not be identical, in all aspects, to the subject company. Rather, the key requirements are that a comparable firm have similar cash flows, growth potential and risk[iii], [iv]. In the Energy XXI case, it is important to note that, although there were no other comparable publicly traded companies operating in the shallow waters of the Gulf of Mexico, other onshore oil and gas companies contained cash flows, growth potential and risk profiles similar enough to be used to estimate how the market would likely value the Energy XXI assets.
Precedent Transactions Analysis
A Precedent Transactions Analysis looks at companies comparable to the target company that were recently bought or sold and uses a multiple based on the purchase price to estimate the value of the target. This method is also susceptible to subjectivity of how “comparable” is defined, as well as the availability of information regarding recent and relevant transactions. To apply a Precedent Transactions Analysis, a multiple must be defined. Although earnings based multiples such as revenue or EBITDA generally provide the best indication of value, the multiple can be based on any observable, relevant metric. When valuing an oil and gas company, daily production may be a sector-specific metric on which to base a valuation. Regardless of the metric selected, this metric needs to be defined clearly and applied consistently across the transactions.
As critical as company selection is to Comparable Company Analysis, so too is the transaction selection in a Precedent Transactions Analysis. The transaction must stand up to the same level of scrutiny as the companies chosen for a Comparable Company Analysis. Recently acquired companies identical to the target would be ideal, but the data on acquisitions may be limited compared to the abundance of public market data. Because of this, a longer time frame is typically acceptable for Precedent Transactions Analysis. The characteristic of each transaction needs to be carefully reviewed and understood to ensure the metrics used and multiples applied are consistent across each transaction. Often times the reported consideration includes contingencies and considerations that can significantly alter the calculated value and this information should be taken into account as part of the Precedent Transaction Analysis.
Discounted Cash Flow Analysis
The traditional and most widely accepted Income Approach method is a Discounted Cash Flow Analysis. In the oil and gas industry, though, this is largely replaced by a NAV analysis. A DCF typically discounts the future projected annual aggregate free cash flow of the entire company. It requires a detailed understanding of the company and its economics. A Weighted Average Cost of Capital (“WACC”) reflective of the risk of the projected cash flows must also be calculated. Because a DCF analysis requires a complete understanding of the underlying assumptions used in the cash flow projections, without full access to company’s management, there may be limited opportunity to examine and audit the underlying assumptions. This is the most significant limitation of a traditional DCF analysis.
Net Asset Value Analysis
A Net Asset Value Analysis determines the value based on the subject company’s reserves and is the standard approach for oil and gas assets[v]. This method provides a detailed discounted net cash flow analysis that extends over the life of each property. To apply the NAV method, cash flow for individual wells or multi-well projects is forecast based on the projected income from the sale of produced oil, natural gas and natural gas liquid. Operating expenses, local production taxes and future capital requirements are included for each well, multi-well project and platform. The projected discounted net cash flow extends over the life of each entity, which may be up to thirty years from the effective date.
Net cash flow projections for the individual entities can be generated using the commercially available ARIES Petroleum Reserves and Economic Software with a provided ARIES Database. Aggregate net cash flow summary forecasts for the various hydrocarbon reserve categories are generated and used as the base for subsequent risk adjustment factor application, resulting in value determination. During the forecasting, minor changes and additions may be required in order to adjust for property reserve categorization or additional costs. In a low price environment, reserves data may not include critical wells or other assets due to economic write-offs, which could be temporary, but profitable if commodity prices increase. Inclusion of additional costs such as Asset Retirement Obligations (ARO), Lease Operating Expenses (LOE), and General and Administrative (G&A) costs is required to account for recognized expenses that are not included in an original ARIES Database. The costs can be incorporated within the primary forecasts or outside of the cash flow projections. Incorporation within the forecasts forces a more accurate economic limit on each projected property, typically resulting in a more correct forecast.
The prices used to project the cash flows are typically based on the West Texas Intermediate crude oil prices and Henry Hub natural gas prices. The applied price projections are based on NYMEX futures and should be selected as close to the valuation date as is reasonable to ensure the forecast takes into account the current market views. Because the valuation is based on current market sentiment, the NAV approach may not be an accurate indicator of Total Enterprise Value when the market prices are set near cyclical peaks or troughs. Additionally, because projected commodity prices are one of the strongest drivers in the computation of a NAV analysis, a sensitivity case should be presented wherein a completely independent crude oil and natural gas price forecast, such as the one available from the U.S. Energy Information Administration (EIA), is applied. Cash flows generated from the reserves and price forecasts are discounted using a WACC and then adjusted using Risk Adjustment Factors (“RAFs”). Adjustment is needed to account for the uncertainty associated with distinct reserve categories. The adjustment procedure is accomplished by applying an individual RAF to the discounted net present value for each reserve category. This method is well established in the oil and gas industry when performing a NAV approach to valuation. Three different sets of RAFs can be applied to generate low, mid and high market value estimates.
Despite its ubiquity in the oil and gas industry, the NAV analysis has limitations that can significantly alter the derived value of oil and gas assets. A NAV is only as accurate as the underlying reserves data and assumptions. An incomplete database or incorrectly applied RAFs can produce unreliable valuation estimates and ultimately have devastating consequences for investors. Additionally, the NAV approach may not be a good indicator of Total Enterprise Value when the “strip price” (pricing derived from the forward NYMEX curve) is set near cyclical peaks or troughs.
Risk Adjustment Factors used in a NAV analysis should also be vetted carefully. Applicable RAFs are dependent on circumstances and quality assessments surrounding a particular oil and natural gas property or portfolio of properties. The application of standardized RAFs, such as those from the Society of Petroleum Evaluation Engineers (“SPEE”) Annual Survey of Parameters used in Property Evaluation ignore the intricacies of NAV analysis. Notably, SPEE itself warns that the information in the Survey is limited in scope, possibly lacks real world detail and likely reflects biases based on individual respondent’s personal experience[vi].
Understanding both the Science and the Art of Oil and Gas Valuation
Valuation is an inherently complex and imprecise process. The Market Approach (Comparable Company Analysis or Precedent Transaction Analysis) provides an estimate of value based on external information to arrive at a relative value. The Income Approach (Net Asset Value Analysis or a traditional Discounted Cash Flow) provides an estimate of value based on internal information from the subject company and attempts to arrive at an intrinsic value. Ideally, one should perform a thorough analysis using all of the accepted valuation methodologies to arrive at a comprehensive view of value. In practice, however, the quality of data available and the circumstances will dictate which methods to use. Based on the relative merits and limitations of each, not all approaches may be appropriate in each instance. Every effort should be made to combine the estimates of value derived from a Market Approach with the estimates of value derived from an Income Approach in order to estimate the value using both internally (company-specific) generated information and externally (market-specific) generated information. In a November 2012 publication on applying fair value measurement, Ernst & Young noted that
“The fair value of a business is often estimated by giving consideration to multiple valuation approaches; such as an income approach that derives value from the present value of the expected future cash flows specific to the business and a market approach that derives value from market data” (Ernst & Young Publication – November 2012 Fair Value Measurement, IFRS 13 Fair Value Measurement)
We believe this guidance holds true when valuing oil and gas assets, particularly when the valuation analysis is part of an overall restructuring plan. Whether in court or out, stakeholders should strongly consider retaining advisors/professionals who understand the complexities and technical issues unique to the oil and gas industry and relying on their experience and expertise. Hiring valuation professionals well-versed in both the science and the art of valuing oil and gas assets is a critical component of a stakeholder group’s ability to achieve a favorable outcome.
About the Authors
Aaron Kibbey is a managing director at Loughlin Management Partners with more than 20 years’ management experience in operations, restructuring, corporate finance, sales and marketing, business development, and mergers and acquisitions. Aaron also has significant experience serving in crisis management positions within companies facing operational and financial challenges. Through his education and professional experience, Aaron has developed expertise in valuing businesses in various industries, including oil and gas, media and entertainment, and telecommunications.
Robert Rasor is the Executive Vice President and Manager of Engineering of H. J. Gruy and Associates, Inc. With more than 30 years of experience in oil and natural gas valuation, Robert has performed hundreds of oil and natural gas valuations, and has served as an expert witness in numerous national and international litigation and arbitration proceedings.
Brian Bostwick is an associate at Loughlin Management Partners with experience in financial restructuring and process improvement. He graduated with honors from Northeastern University.
[i] “Expert Report of Richard Morgner, Jefferies LLC, Penn Virginia Case 16-32395-KLP Doc 438 filed July 18, 2016”
[ii] Swift Energy Company Valuation Analysis, Case 15-12670-MFW Doc 244-5 filed February 5, 2016
[iii] Damodaran, Aswath. Damodaran on Valuation, Security Analysis for Investment and Corporate Finance, Second Edition, John Wiley & Sons, Inc., 2006.Print.
[iv] Pratt, Shannon. Valuing a Business, The Analysis and Appraisal of Closely Held Companies, Fifth Edition, The McGraw Hill Companies, Inc., 2008.Print.
[v] Sinha, M.K. and Poole, A.V., “Selection of a Discount Rate or Minimum Acceptable IRR”, SPE Paper 16843, Proceedings of the 1987 SPE Annual Technical Conference and Exhibition. Print.
[vi] SPEE. “Society of Petroleum Evaluation Engineers Thirty-Third Annual Survey of Parameters Used in Property Evaluation,” June 2014
