Module 13

Question 1

What Key Factors are used by Private Market Investors to determine Assumed basis of debt and interest rates for reporting?

Answer 1

1) Terms and Conditions of Existing Debt
2) Type of Investment (limited life or perpetual)
3) Type of Valuation Approach (levered or unlevered)

Question 2

What Factors are relevant in making determination of whether to service debt at current rates or to refinance/repay?

Answer 2

1) Amount of existing debt and whether cap structure is optimal
2) Amount of refinancing risk associated with repaying and replacing debt
3) Time and costs associated with refinancing
4) Existence of other terms and conditions making it uneconomical to repay debt
5) Differential between existing and market interest

Question 3

What are cashflow projections based on in a Levered Approach?

Answer 3

Contractual cash flows that include actual and expected interest rates and principal repayments based on existing and future debt while discount rates are based on cost of equity considering optimal cap structure

Question 4

What are cashflow projections based on in a Unlevered Approach?

Answer 4

Contractual cash flows while discount rate is based on weighted-average cost of capital considering actual an expected rates on future and existing debt

Question 5

How does the Secondary and Primary Approach of investment valuation differ for private market investors?

Answer 5

Primary Approach - utilize actual or expected market interest rates for debt and deals with cash flow projections and discount rates based on hypothetical sales or exits.

Secondary Approach - Make mark-to-market adjustments in arriving at implied Enterprise value based on estimated value of both equity investment and existing debt (More high-level than anything)

Question 6

What are IPEV Guidelines?

Answer 6

Recommendations intended to represent best practice for valuation of private equity investments under IFRS

Question 7

What do IPEV Guidelines Expressly State?

Answer 7

When an unlevered approach is used, market participant would deduct from enterprise value the amount of financial instruments ranking ahead of highest ranking instruments of the fund in a sale of the enterprise scenario (amount paid) while taking into account effect of any instruments that may dilute funds investment to derive attributable Enterprise Value

Question 8

What are the two key drivers for Private Market Investors when looking at a valuation of private equity investments?

Answer 8

DEBT AND INTEREST RATES