Alternative Investment Pricing Siobhan Durcan Asad Lukwago 25

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Alternative Investment Pricing Siobhan Durcan Asad Lukwago 25 October 2012 © 2012 Deloitte LLP. Alternative Investment Pricing Siobhan Durcan Asad Lukwago 25 October 2012 © 2012 Deloitte LLP. Private and confidential.

Agenda 1. Real Estate Pricing - 2. Private Equity Pricing - 2 Siobhan Durcan Agenda 1. Real Estate Pricing - 2. Private Equity Pricing - 2 Siobhan Durcan Asad Lukwago © 2012 Drivers Jonas Deloitte. All rights reserved.

Real Estate Pricing 3 © 2012 Drivers Jonas Deloitte. All rights reserved. Real Estate Pricing 3 © 2012 Drivers Jonas Deloitte. All rights reserved.

Real Estate Valuation Understanding the Science; Appreciating the Art ! © 2012 Deloitte LLP. Real Estate Valuation Understanding the Science; Appreciating the Art ! © 2012 Deloitte LLP. Private and confidential.

The Science © 2012 Deloitte LLP. Private and confidential. The Science © 2012 Deloitte LLP. Private and confidential.

The Valuer’s Toolkit Gone are the days…. © 2012 Deloitte LLP. Private and confidential. The Valuer’s Toolkit Gone are the days…. © 2012 Deloitte LLP. Private and confidential.

The Valuer’s Toolkit More scientific and more analytical……. but still ‘market informed’. © 2012 The Valuer’s Toolkit More scientific and more analytical……. but still ‘market informed’. © 2012 Deloitte LLP. Private and confidential.

Demystifying the ‘yield’ Yield describes the amount returned to an investor through income generation Demystifying the ‘yield’ Yield describes the amount returned to an investor through income generation as a proportion of his or her investment. Return describes the amount returned to an investor through either income generation and/or capital value change as a proportion of his or her investment. Years Purchase (“YP”) is the fundamental valuation concept that provides the link between Yield and Value. Yield Expressed as a percentage Year Purchase (YP) Inverted yield figure to provide multiplier Value Result of multiplying YP with income (rent). © 2012 Deloitte LLP. Private and confidential.

Yields, Yields and more Yields… Initial Reversionary Running Equivalent • Relationship between value and Yields, Yields and more Yields… Initial Reversionary Running Equivalent • Relationship between value and current contracted income. • Can hide / mask upcoming income variations. • Also known as the “All Risks Yield” • Relationship between value and the anticipated income upon reversion – either Market Rent, fixed increase or another “Estimated Rental Value”. • Care required – what assumptions have been made in establishing what the reversionary income will be ? • The ‘Snapshot’ yield. • Relationship between value and the anticipated income at a given point in time. • “The Valuers’ Choice” ! • Relationship between value and ‘time weighted’ average income. • Two forms – Nominal (income annually in arrears) is most common. ‘True’ (income quarterly in advance) Equivalnt © 2012 Deloitte LLP. Private and confidential.

The Method Matrix The ‘Five’ Valuation Methods Common Name Comparable Investment Residual Profits DRC The Method Matrix The ‘Five’ Valuation Methods Common Name Comparable Investment Residual Profits DRC Also known as Comparative Capitalisation Development Accounts Contractors Adopted in situations where an element of ‘development’ value exists. Due to the significant number of different input variables used a sensitivity analysis is imperative to accompany the reported value. Generally adopted when property value underpinned by the trading potential eg. Pubs & leisure, hotel, petrol station, airport, self storage, car park Simplistic Description/ approach, often Comment used in tandem with one of the other methods. The most common approach adopted for ‘conventional’ investment property. Two Forms…. Traditional • Term & Rev. • Hardcore Modern • DCF For properties that are rarely traded and for financial statements: art galleries, schools … © 2012 Deloitte LLP. Private and confidential.

Investment Valuation Methods: Critique Traditional Methods Modern Methods (Term & Reversion and Hardcore) (Discounted Investment Valuation Methods: Critique Traditional Methods Modern Methods (Term & Reversion and Hardcore) (Discounted Cashflow) • Simple • Particularly easy to deploy when there is plentiful comparable evidence • Differentiation / Layering of risk is ‘intuitive’ • Lack flexibility when dealing with increasingly wide variety of asset types and income profiles. • Use of ‘All Risks Yield’ is relatively ‘blunt’ • • Transparent ‘Easy’ to build for complex scenarios Straightforward sensitivity analysis Overcomes risk of ‘double-counting’ income • Heavily reliant on quality of input data • Explicit nature of inputs unlikely to ‘mirror’ investment drivers of all investors – therefore inherently a method more akin to an assessment of ‘worth’. © 2012 Deloitte LLP. Private and confidential.

The Art 12 Deloitte © 2012 Deloitte LLP. Private and confidential. The Art 12 Deloitte © 2012 Deloitte LLP. Private and confidential.

Interpreting the Numbers “A cynic is someone who knows the price of everything but Interpreting the Numbers “A cynic is someone who knows the price of everything but the value of nothing. ” Oscar Wilde © 2012 Deloitte LLP. Private and confidential.

The Official Line RICS Red Book “Valuations are opinions and judgments on the price The Official Line RICS Red Book “Valuations are opinions and judgments on the price which could be achieved in a transaction subject to certain assumptions or special assumptions and interpretation of the market. ” Interpretation of: • Comparable Evidence • Legal tenure and tenancy arrangements • Advice set out in specialist reports – eg. Building Surveys Judgement on: • Market’s perception of Tenant Covenants • Liquidity & Market appetite / ability to act © 2012 Deloitte LLP. Private and confidential.

The Interpretations – Comparables YIELDS Location Proximity Date ‘Arm’s Length’ Specification ‘Comparability’ Covenant Condition The Interpretations – Comparables YIELDS Location Proximity Date ‘Arm’s Length’ Specification ‘Comparability’ Covenant Condition Scale Tenure © 2012 Deloitte LLP. Private and confidential.

The Interpretations – Specialist Reports • What are the important messages in the reports The Interpretations – Specialist Reports • What are the important messages in the reports ? • How would ‘the market’ react ? • • • Building Surveys Environmental Reports Ground Condition Reports and Certificates on Title Town Planning Reviews Rights of Light Issues Tenant Covenant Reports Current and Impending legislation Sector specific intelligence Energy Performance Certificates Sustainability Reports © 2012 Deloitte LLP. Private and confidential.

The Art…. Conclusions The computer helps…. ……………. . but experience and insight are essential The Art…. Conclusions The computer helps…. ……………. . but experience and insight are essential ! © 2012 Deloitte LLP. Private and confidential.

Market Monitor 18 Deloitte © 2012 Deloitte LLP. Private and confidential. Market Monitor 18 Deloitte © 2012 Deloitte LLP. Private and confidential.

UK Net Investment by Type of Buyer (£m) Source: Property Data © 2012 Deloitte UK Net Investment by Type of Buyer (£m) Source: Property Data © 2012 Deloitte LLP. Private and confidential.

Deloitte prime yield monitor Changing sentiment since 2009 Sector Category Jun-09 Jun-10 Jun-11 Jun-12 Deloitte prime yield monitor Changing sentiment since 2009 Sector Category Jun-09 Jun-10 Jun-11 Jun-12 Prime Major Cities Shopping Centre 0. 00 1. 00 0. 00 0. 00 -1. 00 Cathedral Cities 0. 00 1. 00 0. 00 1. 00 0. 00 -1. 00 Market Town Shops 0. 00 -1. 00 0. 00 1. 00 0. 00 0. 00 -1. 00 Prime Regional 0. 00 1. 00 0. 00 1. 00 0. 00 -1. 00 Prime town centre Retail Warehouse -1. 00 0. 00 -1. 00 1. 00 0. 00 -1. 00 Parks (open A 1) 0. 00 1. 00 0. 00 1. 00 0. 00 -1. 00 Parks (bulky) 0. 00 1. 00 0. 00 1. 00 0. 00 -1. 00 Solus Car Showrooms Manufacturers -1. 00 1. 00 0. 00 0. 00 -1. 00 0. 00 1. 00 0. 00 0. 00 -1. 00 Dealerships -1. 00 0. 00 1. 00 0. 00 -1. 00 Leisure Parks -1. 00 0. 00 1. 00 0. 00 Supermarkets Standalone superstore 0. 00 1. 00 0. 00 0. 00 Distribution (15 year term) 0. 00 1. 00 0. 00 0. 00 Distribution (Inside M 25) Modern Ind. Est. (outside M 25) 0. 00 1. 00 0. 00 0. 00 Industrial 0. 00 1. 00 0. 00 0. 00 -1. 00 Modern Ind. Est. (inside M 25) 0. 00 1. 00 0. 00 1. 00 0. 00 Older terrace / estate -1. 00 0. 00 1. 00 0. 00 0. 00 -1. 00 City Offices 0. 00 1. 00 0. 00 1. 00 0. 00 -1. 00 0. 00 West End 0. 00 1. 00 0. 00 1. 00 0. 00 0. 00 Edge of Core 0. 00 1. 00 0. 00 0. 00 -1. 00 Western Corridor 0. 00 1. 00 0. 00 -1. 00 0. 00 Major Cities 0. 00 1. 00 0. 00 -1. 00 0. 00 Business Parks -1. 00 0. 00 1. 00 0. 00 -1. 00 © 2012 Deloitte LLP. Private and confidential.

The Rationale & Recent Experiences On 1 st April 2011 the RICS set up The Rationale & Recent Experiences On 1 st April 2011 the RICS set up Valuer Registration, due to pressure from external regulators and a perception that some valuers are “sailing too close to the wind”. Dangers § Recent questionable assumptions/practices resulting in inaccurate valuations: 1. Validity of Transactions – related-party transactions, e. g. JV partners entered into, in order to support values; 2. Data validation – insufficient validation of data adopted into valuations; 3. Tenants’ assumed ability to pay rent – weak covenant understanding by valuers in difficult markets; 4. Hope value – optimistic levels included with little justification; and 5. Developer’s profit – no profit allowance on unfinished developments - understating risk to completion. Added Value § Audit quality enhanced through use of specialists within the firm: 1. Providing ‘comfort’ in uncertain times; 2. Active in the market – can challenge valuers on key valuation assumptions with ‘first hand’ experience; 3. Risk reduction – property assets are often a very substantial part of the balance sheet; 4. Enhanced objectivity – In-house valuers – used to delivering external valuations – are able to provide an objective view; and 5. Jargon busted – Valuers terminology understood. © 2012 Deloitte LLP. Private and confidential.

Our Service Offer Transaction Support Corporate Valuation Investment Real Estate Public Sector Valuation Purposes Our Service Offer Transaction Support Corporate Valuation Investment Real Estate Public Sector Valuation Purposes Property Strategy & Negotiation Loan Advisory Accounts Valuations & Assurance Portfolio Administration Tax Interest Restructuring Advice ‘Best Value’ Charity Advice Litigation Support 22 © 2012 Deloitte LLP. Private and confidential.

Valuation Assurance – Existing audit support clients § Traditionally, ‘Real Estate’ focused § Increasing Valuation Assurance – Existing audit support clients § Traditionally, ‘Real Estate’ focused § Increasing focus on ‘FSI’ and ‘Consumer Business’ © 2012 Deloitte LLP. Private and confidential.

Contacts Philip Parnell Greg Branch Tel: 020 7303 389 Email: pparnell@djdeloitte. co. uk Tel: Contacts Philip Parnell Greg Branch Tel: 020 7303 389 Email: [email protected] co. uk Tel: 01534 824325 Email: [email protected] co. uk Andrew Isham Siobhan Durcan Tel: 01534 824297 Email: [email protected] co. uk Tel: 01534 824274 Email: [email protected] co. uk © 2012 Deloitte LLP. Private and confidential.

This document is confidential and prepared solely for your information. Therefore you should not, This document is confidential and prepared solely for your information. Therefore you should not, without our prior written consent, refer to or use our name or this document for any other purpose, disclose them or refer to them in any prospectus or other document, or make them available or communicate them to any other party. No other party is entitled to rely on our document for any purpose whatsoever and thus we accept no liability to any other party who is shown or gains access to this document. Deloitte LLP is a limited liability partnership registered in England Wales with registered number OC 303675 and its registered office at 2 New Street Square, London EC 4 A 3 BZ, United Kingdom. Drivers Jonas Deloitte is a trading name of Deloitte LLP, which is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited ('DTTL'), a UK private company limited by a guarantee, whose member firms are legally separate and independent entities. Please see www. deloitte. co. uk/about for a detailed description of the legal structure of DTT and its member firms. © 2012 Deloitte LLP. Private and confidential.

Private Equity Update & investment valuation Asad Lukwago © 2012 Deloitte LLP. Private and Private Equity Update & investment valuation Asad Lukwago © 2012 Deloitte LLP. Private and confidential.

Structure Market update Investment valuation 27 © 2012 Deloitte LLP. Private and confidential. Structure Market update Investment valuation 27 © 2012 Deloitte LLP. Private and confidential.

Market update Key industry drivers Current market conditions Authorities Level of market activity • Market update Key industry drivers Current market conditions Authorities Level of market activity • New and upcoming regulations; • Tax authorities challenging tax structures; • Low exit and new deal activity; • Challenging fundraising times. ‒ PC deal structures – leverage; ‒ Tax on management fee waivers; ‒ Taxation of carried interest. 28 © 2012 Deloitte LLP. Private and confidential.

Market update (Cont. . ) Private equity fundraising Source: Preqin Research Report Q 3 Market update (Cont. . ) Private equity fundraising Source: Preqin Research Report Q 3 2012 29 © 2012 Deloitte LLP. Private and confidential.

Market update Private equity fundraising (Cont. . ) Increased investor demand ‒ cut on Market update Private equity fundraising (Cont. . ) Increased investor demand ‒ cut on management fees ‒ management fee offsets (increased pressure on 100% offset for all fee income) ‒ limits to amount of capital that can be invested in any given year ‒ bringing down the voting threshold from 75% to 50% to affect changes to a Fund (“Doomsday” Scenarios) ‒ most are demanding a preferred return huddle ‒ squeeze on carried interest ‒ limitations with respect to selling stakes in GP to third parties ‒ increased scrutiny of partnership expenses 30 © 2012 Deloitte LLP. Private and confidential.

Market update Private equity fundraising (Cont. . ) Responses for GPs include: ‒ Economic Market update Private equity fundraising (Cont. . ) Responses for GPs include: ‒ Economic incentives for early closings (sweeteners/fee breaks) ‒ Management fee discounts ‒ Choice of higher management fee for 100% offset against fee income ‒ Increasing GP’s commitment to at least 2% and up to 5% (as opposed to 1%) ‒ Wider scope of target investors (South America, Middle East, China) ‒ “Anchor” or “Strategic” LPs, demanding/offered preferential terms ‒ Debt funds 31 © 2012 Deloitte LLP. Private and confidential.

Determination of fair value 32 Presentation title © 2012 Deloitte LLP. Private and confidential. Determination of fair value 32 Presentation title © 2012 Deloitte LLP. Private and confidential.

Valuation Guidelines vs Accounting Standards IPEV Guidelines issued September 2009 (New layout August 2010). Valuation Guidelines vs Accounting Standards IPEV Guidelines issued September 2009 (New layout August 2010). Issued to provide framework to enable managers to present the fair value of an investment consistent with the underlying GAAP IFRS 13 sets out a framework for measuring fair value in a single IFRS Similarities • Definition of fair value • Valuation techniques ‒ Market approach (Both) ‒ Cost approach (IFRS 13 only) ‒ Income approach (Both) • Both don’t preclude the use of mid-market pricing or other conventions used by market participants within a bid-ask spread for listed instruments; • • • Differences IPEV Guidelines cover more valuation techniques for asset instruments; IFRS 13 more elaborate on the valuation techniques it covers IFRS 13 also covers valuation of liabilities and entity’s own equity instruments; IFRS 13 permits (but doesn’t require) use of bid prices to value quoted asset positions and ask prices for liability positions; IPEV Guidelines allow discounting quoted prices in certain circumstances. 33 © 2012 Deloitte LLP. Private and confidential.

Fair value definition and key principles Liability Asset The price that would be received Fair value definition and key principles Liability Asset The price that would be received to sell the asset Fair value is an EXIT PRICE For non-financial assets In an orderly transaction • The highest & best use of the asset • Whether the asset is used in combination with other assets or standalone 34 Between market participants At measurement date Price that would be paid to transfer the liability • NOT how much paid to settle liability • Based on how much the reporting entity has to pay to a willing market participant © 2012 Deloitte LLP. Private and confidential.

Determination of Fair Value • Fair value is a market-based measurement, not an entity-specific Determination of Fair Value • Fair value is a market-based measurement, not an entity-specific measurement: - Use market assumptions, under current market conditions (including risk); and - Entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant • Assumes business is realised at the reporting date, appropriately allocated to the various interests, regardless of whether the business is prepared for sale or whethere is any intention to sell in the near future 35 © 2012 Deloitte LLP. Private and confidential.

Enterprise value In PE, value is generally crystallised through a sale of the entire Enterprise value In PE, value is generally crystallised through a sale of the entire underlying business. The value of the business as a whole at the reporting date (Enterprise Value (“EV”)) will often provide a key insight into the value of investment stakes in that business. Fair value is estimated from the EV as follows; 1. Determine EV using the valuation methodologies 2. Adjust EV for surplus assets or excess liabilities 3. Deduct instruments ranking ahead of the highest ranking instrument of the Fund 4. Apportion the Attributable EV between the company’s relevant financial instruments according to their ranking 5. Allocate the amounts derived according to the Fund’s holding in each instrument, representing Fair Value 36 © 2012 Deloitte LLP. Private and confidential.

Valuation Methodology Unquoted Investments 1. Price of recent investment • How measured in due Valuation Methodology Unquoted Investments 1. Price of recent investment • How measured in due diligence work prior to purchase? • Third party transactions • Reference to a transaction that is substantially the same • Milestone analysis 2. Earnings Multiple • • • EBITDA, EBIT or Revenue Normalised LTM Choice of multiples ‒ ‒ Comparables (basket of quoted companies Vs recent observable transaction) Correlation with the earnings used Historic, current or forecast Discount (differences in comparable companies, liquidity, control) 37 © 2012 Deloitte LLP. Private and confidential.

Valuation Methodology Unquoted Investments (cont. . ) 3. Net Assets 4. Discounted cash flows Valuation Methodology Unquoted Investments (cont. . ) 3. Net Assets 4. Discounted cash flows or earnings • • of underlying business from the investment 5. Industry valuation benchmarks 38 © 2012 Deloitte LLP. Private and confidential.

Valuation Methodology (cont…) Valuation Guidelines for Fund-of-Funds Reported Net Asset Value Adjustment to the Valuation Methodology (cont…) Valuation Guidelines for Fund-of-Funds Reported Net Asset Value Adjustment to the reported NAV • No accrual for potential performance fees or carried interest; • Significant elapsed time between the reporting date of the investee fund and the Fund-of-Funds reporting date; • Information from a secondary transaction providing it is sufficient and transparent; • Particular clauses in the Fund agreement that affect distributions which are not reflected in apportioned NAV; and • Differences in valuations by fund manager GPs for common companies with identical security holdings. 39 © 2012 Deloitte LLP. Private and confidential.

Valuation Methodology (cont…) Quoted Investments • Should be valued at bid prices • Use Valuation Methodology (cont…) Quoted Investments • Should be valued at bid prices • Use of representative point estimate in a bid/offer spread (Mid Market price) • Discount reflecting the time value of money and the additional risk from reduced liquidity 40 © 2012 Deloitte LLP. Private and confidential.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www. deloitte. co. uk/about for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. © 2012 Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England Wales with registered number OC 303675 and its registered office at 2 New Street Square, London EC 4 A 3 BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198. Member of Deloitte Touche Tohmatsu Limited © 2012 Deloitte LLP. Private and confidential.




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