Portfolio Valuation

Indian Institute of Management PGP II

Carlton Pereira

Contents
Genesis Valuation Methods Investors IRR Fair Market Value Unquoted Investments Quoted Investments

Genesis
No mandatory standards previously existed -- now moving towards more consistent reporting standards PE industry was away from the public eye -- now moving towards more transparency Different interpretations possible for unquoted investments -- now moving towards uniform standards Proliferation of GPs means that LPs must have standard methodologies to evaluate relative performance Performance varies at two levels -- Fund level (Gross IRR or Cash-on-Cash IRR) and Investor level (Net IRR or IRR-to-Investor) - due to fee drag, f/x variations, etc

Measuring the Investors IRR -- Components

Investment is on commitment basis Management fees are paid on
Committed capital during commitment period Invested capital post commitment period

Inflows and outflows

Outflows Management fees Fund expenses (audits, etc) Deal expenses Capital commitments Inflows Deal fees (may be offset against management fees) Dividends / interest Investment returns (net of taxes and carried interest)
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Performance Measurement - Fund v/s Investor

Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total IRR Investment Investment Cash-onFees to Outflows Realized Cash Return Manager -70.00 -50.00 -50.00 -150.00 -110.00 -430.00 150.00 280.00 460.00 160.00 1050.00 -70.00 -50.00 -50.00 -150.00 -110.00 0.00 150.00 280.00 460.00 160.00 620.00 18.41% -15.00** -10.00 -10.00 -10.00 -10.00 -7.50 -5.00 -2.50 -2.00 -1.00 -73.00 Pre-Carry Cumulative Cash Flow Cash Flow -85.00 -60.00 -60.00 -160.00 -120.00 -7.50 145.00 277.50 458.00 159.00 547.00 15.11% -85.00 -145.00 -205.00 -365.00 -485.00 -492.50 -347.50 -70.00 388.00 547.00 Carry to Manager -150.00 -150.00 Investor's Cash Flow -85.00 -60.00 -60.00 -160.00 -120.00 -7.50 145.00 277.50 458.00 9.00 397.00 12.36%

Fund X Gross IRR is 18.41% but Investors Net IRR is 12.36%.

** Initial year fees includes Organization Expenses @ 1% of Fund size (taken at 500) Shaded cells indicate fee base is on net invested amount, since commitment period has ended

Performance Measurement -- Fund v/s Investor

Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total IRR Cash Flow INR -400.00 -50.00 -50.00 -30.00 50.00 300.00 690.00 510.00 13.88% INR/USD 40.00 41.00 42.00 40.00 54.00 55.00 56.00 Cash Flow USD -10.00 -1.22 -1.19 -0.75 0.93 5.45 12.32 5.54 7.02%

13.88% IRR in INR terms, but 7.02% in USD terms.

Valuation Methods
Conservative Value
At cost, unless Market Value is lower than cost

Fair Market Value

Applied for periods subsequent to year of investment

Timing
Preferably twice a year

Conduct
By independent accounting / audit firm

Market Value - Unquoted Companies (EVCA)

Using Comparable Company Multiples (CCM)
P/E; P/CF; EV/EBITDA; EV/EBIT Provided relevant peer set exists Valuation per last round of funding Valuation per most recent independent third party transaction in a comparable company

DCF Method; where CCM does not exist Liquidity discount

For conservatism Upto 25% (using judgment)
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Comparable Company Valuation Steps

Compile and select the list of comparable companies
- Ensure that the peers share similar industry, business, and financial characteristics with the target

Calculate relevant financials and multiples

- Normalize the financials to adjust for one-time / non-recurring items that temporarily distort earnings

Apply valuation and analyse the results Apply a liquidity discount

Comparable Company Valuation Steps

Fund A holds a 12% stake in ABC, an unquoted mid-sized oncology focused pharmaceuticals company
Comparable Companies # Strides Arcolab Natco Pharma Fresenius Kabi Oncology Average Portfolio Company ABC TTM PAT (INR) 420 Av P/E * (x) 24 Mkt Cap (INR) TTM PAT (INR) 39,710 2,340 11,380 606 20,800 597 P/E (x) 17 19 35 24 Value @ (INR) 1,186

Valuation (INR) 9,884

Stake (%) 12%

# TTM PAT of FY12, Market Cap around 31-May-2012 * Can take weighted average P/E as well @ Value is pre-liquidity discount (discussed subsequently)

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Market Value - Quoted Companies (EVCA)

Market price -- last trading day Discount for locked up shares (minimum 25%) If ratio of block held to quarterly traded volumes > 30%, additional 5-15% discount (using judgment)

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Portfolio Valuation
Fund D has 6 portfolio companies valuation method below
Company
AAA BBB CCC DDD EEE FFF

Investment Description Date

Jun-06 Jun-11 Mar-10 Sep-10 Nov-08 May-12 Unlisted and profitable Listed; low trading volumes Listed; widely traded Unlisted; EBITDA +ve, PAT -ve Unlisted; EBITDA -ve Unlisted

Valuation Method
Comparable Company Valuation using P/E Multiple Market Value on Valuation Date with Liquidity Discount of 25% Market Value on Valuation Date with Liquidity Discount of 5% Comparable Company Valuation using EV/EBITDA Multiple Written Down by 50% (judgement call) At Cost -- investment is recent

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