Valuation of CapMan funds' investment targets is based on international valuation guidelines that are widely used and accepted within the industry and investors. CapMan always aims at valuing funds’ investments at their actual value. Fair value is the best estimate for the amount for which an investment could be exchanged on a reporting date in an arm's length transaction between knowledgeable and willing parties.
Valuation of a portfolio company
Determining the fair value of fund investments for funds investing in portfolio companies is carried out using International Private Equity and Venture Capital Valuation Guidelines (IPEVG). In estimating fair value for an investment, CapMan applies a technique or techniques that is/are appropriate in light of the nature, facts, and circumstances of the investment in the context of the total investment portfolio. In doing this, current market data and several inputs, including the price at which an investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment, are evaluated and combined with market participant assumptions. In selecting the appropriate valuation technique for each particular investment, consideration of those specific terms of the investment that may impact its fair value is required.
Different methodologies may be considered. The most applied methodologies at CapMan include the price of recent investments, which is typically applied in the case of new investments, and the earnings multiple valuation technique, whereby public peer group multiples are used to estimate the value of a particular investment. Due to qualitative nature of the valuation methodologies, they are mainly based on CapMan’s judgment.
Valuation of real estate
Investments in real estate are valued at fair value based on appraisals made by independent external experts, who follow International Valuation Standards (IVS). The method most appropriate to the use of the property is always applied, or a combination of such methods. The different methods include the income method (cash flow method or direct capitalisation), the sales comparison value method or the cost method. The income method refers to determining the fair value of a property on the basis of the income receivable from it during its economic lifetime. It is based on capitalisation of annual income return at an appropriate yield. In the sales comparison value method, the value is determined on the basis of comparable transactions in the market conditions prevailing in the specific market area. The object of the transaction in a comparable transaction corresponds in its average value factors to the property being appraised. The cost method is based on the acquisition and production costs of the property. This method is mainly used when sufficient market information for applying the other methods is unavailable.
Valuation process and parties
CapMan continuously monitors the fair value development of its investments. Portfolio companies are valued four times a year in conjunction with CapMan Plc’s interim financial reporting.
In the first phase of the valuation process investment professionals responsible for portfolio companies, together with the Performance Monitoring team, make proposals on the valuations of investment targets and compile material to support the valuation levels. In the following phase the Group’s Performance Monitoring team, which is independent of the investment teams, checks the correctness of the principles applied in the proposals and the continuity of the principles used between different investment targets and different points of time. The Performance Monitoring team also drafts proposals to the Valuation Committees.
Each fund has its own Valuation Committee. The task of Valuation Committees is to assess valuations and ensure that the same valuation principles are consistently applied in all portfolio companies, and that the principles comply with IPEV guidelines. The committees comprise of CFO, Head of the Performance Monitoring team, and either Risk Manager of the fund or Head of Investment team.
In the last phase of the valuation process the fund auditors, representing the fund investors, audit the material supporting the calculations and ensure that the valuation methods are in line with fund agreements and IPEVG guidelines. In addition the CapMan Plc auditors audit that valuations for CapMan Plc’s own fund investments are made according to IFRS standards.