wilmott.com

HelloI was wondering what the consensus is on valuing a private asset manangement company. A friend of mine has a minority equity holding in an asset management company. He wishes to leave and realise the value of equity. The problem is the value of that equity.Some ofbthe other equity holders in the buiness, though not all, are suggesting that the company should be valued on 6 or 7 times earnings, as there is a risk that if the head of the comapny leaves, funds would flow out as clients would pull their money. These same people are suggesting that it is appropriate to use a high discount rate (Even up to 35%) to allow for this same risk.The caompany makes 2.5m NPAT, and this should grow to 5m NPAT in 2 years time, assuming the head doesn't leave adn money doesn't flow out.At 7X NPAT the company would ne worth 17.5mBut on basis 1% of FUM the company would be worth 33m given that it has 3.3 billion under mangement.Based on a multiple of listed asset managers the company is worth around 44m.Any ideas greatly appreciatedDrew

Your friend should contact Gur Huberman for a paper with a much higher valuation.Assuming the head of the company is a major equity holder, the given argument suggests a deep governance problem (if he is that essential to the business, and not a major equity holder, it suggests another problem).Another aspect to consider is minority holders rarely have the right to demand full value for their shares. The remaining equity holders are generally free to offer what they want, zero if they don't want any cash to leave the business. It's hard to find outside investors to buy the shares, because no one wants to be a minority partner with people they don't know. Typically minority shareholders only have the right to fair value if they are forced to sell, or if the profits are being accumulated unreasonably. This is not intended to be legal advice, it's just that your post suggests the other holders are under some obligation to offer a fair value.As a practical matter, asset management firms shy away from disputes with anyone. Any controversy can drive away investors. Your friend is in the same boat, a public disagreement can harm the value of his shares. Things work best when everyone keeps that in mind and comes to a sensible compromise. Typically that means some cash today, and some percentage of revenues over two or three years.

What sort of assets does the fund manage?What are their fees?What role does your friend play?Firm track record relative to peers?Is there a fund lockup?Typically MM firms are valued according to AUM/fees they can produce(fixed mutual fund would sell for less relative to a equity based mutual fund).

QuoteOriginally posted by: Tait5HelloI was wondering what the consensus is on valuing a private asset manangement company. A friend of mine has a minority equity holding in an asset management company. He wishes to leave and realise the value of equity. The problem is the value of that equity.I'd suggest a third party who liked the firm might pay a small multiple of yearly gross revenues, say 2 X revenues for example.If your friend's partner's thought this way, and anticipated such a trancation, they might offer 1 X revenues to acquire his shares.