Valuations – Practical Questions for PE Investor Igor Zax, CFA Tenzor Ltd Presentation at C5 conference “ CEE Private Equity” © Tenzor Ltd 2010 www.tenzor.co.uk

© Tenzor Ltd 2010 www.tenzor.co.uk Valuation Challenge Two main approaches – multiples or DCF Multiples – mostly focused on ratio - in unstable economic environments it is much more important what is the underling number (last year profit may be current year loss) DCF – most of the approaches are based on public markets and perpetual holding © Tenzor Ltd 2010 www.tenzor.co.uk

Investors are different Public investors. Virtually never alternative to PE when buying the company, rarely an exit root. Industry buyers. “Real” competitor on many deals, frequent exit root. PE investors. Often competitor, historically common exit root (secondary buyouts) © Tenzor Ltd 2009 www.tenzor.co.uk

Valuation for PE investor PE investors are temporary holders with clearly defined target period. Valuation for PE investor is exit price discounted by target rate of return. Question is not what the company suppose to be worth today, but WHO will buy it, at what price and what should be done to maximise it. © Tenzor Ltd 2010 www.tenzor.co.uk

© Tenzor Ltd 2009 www.tenzor.co.uk Industry Sale One of the most common exit roots in many asset classes Questions to ask: Why would an industry buyer want to buy? Why they are not doing it now? What is the value of the business to them and what is the cost of NOT acquiring. What can be done between now and then? © Tenzor Ltd 2009 www.tenzor.co.uk

Industry Sale- Main Strategies Venture capital- long time common root. Understanding technology gaps for major players and taking developing risk (software, biotech, etc.). Corporate governance. Building western style, highly transparent organisation and selling it to global player at a premium. “Farming”. Combining a number of smaller businesses that industry buyer would not consider due to their size © Tenzor Ltd 2009 www.tenzor.co.uk

Industry Sale- Main Strategies Risk based sale. Mainly applicable to distressed companies that are vital in a supply chain of a major companies. Often a de facto put option. Industry consolidation- particularly where profitability disproportionally increases with size (such as some areas of retail). Value chain shift © Tenzor Ltd 2009 www.tenzor.co.uk

Practical Implications Start with exit – defining likely exit root is core for valuing the company. Understand the needs of potential buyers and premium they are willing to pay for meeting it. Design a clear plan of tailoring the company to the buyers need. Analyse Scenarios. © Tenzor Ltd 2009 www.tenzor.co.uk

Practical Implications Discounting expected outcome by your target rate over expected horizon is the price you are willing to pay – you may get away with less. Analyse seller’s motivation and competition “Name me the price, I will name you the terms” © Tenzor Ltd 2009 www.tenzor.co.uk

© Tenzor Ltd 2009 www.tenzor.co.uk Thank You and Good Luck! Igor Zax, CFA, Sloan Fellow (London Business School) Managing Director, Tenzor Ltd. (London) Tel: +447775708426 E-Mail: igor.zax@tenzor.co.uk Web site: www.tenzor.co.uk © Tenzor Ltd 2009 www.tenzor.co.uk