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| Adams Capital frequently determines the fair market value of complex, illiquid investment vehicles, such as hedge funds. A hedge fund is traditionally organized as a limited partnership. This organization requires the valuation professional to consider traditional restrictions related to lack of marketability and lack of control that are inherent in a limited partner interest. Hedge funds and private equity funds also have unique characteristics that limit their marketability. If not properly addressed, the analysis will yield an incorrect valuation, potentially unnecessarily increasing the client's tax burden. In addition to intentionally limiting the marketability of a limited partner interest, the general partner of a hedge fund may only periodically provide an accounting of the limited partner's interest. In most cases, these accountings are not appraisals and do not consider discounts for lack of marketability or control. For example, Adams Capital recently valued an interest in a hedge fund that had been transferred to a trust.
Hedge funds often use tools such as side-pockets and gate provisions to avoid investor withdrawals interfering with the fund manager's long term investment philosophy. A side-pocket provision allows a hedge fund manager to designate a certain portion of the portfolio as being illiquid assets. A limited partner's pro-rata interest in this side-pocket is typically restricted from withdrawal for a certain period of time. Furthermore, a gate provision allows the general partner of a hedge fund to limit the amount of withdrawals from a fund in a given time period.
These restrictions must be specifically addressed by an appraiser in order to accurately determine the fair market value of the limited partner interest. Adams Capital’s proprietary modeling techniques allow us to accurately determine the lack of marketability and lack of control discounts appropriate for these unique situations. If you are considering investment in or transfer of a hedge fund interest, call us to discuss potential valuation issues.
Merger and Acquisition Market Data
The following table and chart summarize merger and acquisition transaction data during the previous twelve months. The transactions include both public and private companies and are grouped into three month periods. The overall median enterprise value to EBITDA multiple remained unchanged from last month at 7.5x. The trough from March to May 2009 can be seen in the overall median multiples. During the most recent period, energy, consumer discretionary, and information technology multiples have shown improvement.
Overall Transactions During Latest Twelve Months 
The Overall Transactions chart shows that the total number of mergers and acquisitions increased during the latest three months. Coupled with a significant increase in the mean transaction value, the total value of mergers and acquisitions has increased dramatically since the spring and summer. Based on available transaction data, there were 5,997 transactions with a mean transaction value of $187.1 million from September to November 2009. This suggests a total value of $1.1 trillion. For the period from June to August 2009, there were 5,872 transactions with a mean transaction value of $100.3 million, suggesting a total transaction value of $0.6 trillion. These findings are based on publically available information and therefore omit some private transactions. In spite of this limitation, there is significant evidence suggesting capital is returning to the market. A startup wireless communication company needed to determine the value of newly issued, non-voting equity awarded to its management team for a Section 83(b) election. The company was highly levered with complex preferential returns to debt holders based on the company’s future selling price. For these reasons, the newly issued equity was subject to substantial risk. The company utilized a Section 83(b) election to report the equity issue as income on the management team's tax returns. Adams Capital considered these risks and preferences in determining the fair market value of the newly issued equity to comply with IRS guidelines. The results are lower audit risk for the company and lower tax rates for the management team.
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Adams Capital, Inc. is a national business valuation practice with clients in 50 states and more than 20 countries. We are recognized for our thoughtful approach to complex business valuation matters.
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