PRIVATE EQUITY AND HEDGE FUND INTERESTS
Appraisal Economics Inc. has conducted a valuation of an interest in a holding company that owns limited partnership interests in hedge funds, managed futures funds, and private equity funds, and direct investments in two private companies. Our engagement consisted of valuing each hedge fund interest, managed futures fund interest, private equity fund interest, and valuing the investments in the private companies. Then we valued the interest in the holding company for tax purposes. Interests in alternative investments and holding companies are generally non-controlling and illiquid, and may require the application of discounts for lack of control and discounts for lack of marketability to determine the fair market value. Selecting credible discounts requires understanding the economic structure, legal rights and restrictions, and nature of the markets for these types of privately held investments.
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OUTPERFORMANCE PLAN WITH ACCELERATION FEATURE
Appraisal Economics Inc. has determined the fair value of an outperformance plan (OPP) granted to employees of a real estate investment trust (REIT). This OPP grants employees shares of the company’s publicly traded common stock based on the achievement of certain absolute and relative performance hurdles at the end of the performance period. These market-based performance conditions are intended to align the goals of the employee grantees with shareholders. In addition to the absolute and relative performance hurdles, which are based on the company’s and peer group companies’ total shareholder return (TSR) adjusted for dividends, the plan also has a complex acceleration feature. Under the acceleration feature, grantees can earn and receive shares of the company’s common stock on earlier dates (before the end of the performance period) if the company has already achieved the maximum absolute or relative TSR target. In addition to determining the fair value of outperformance plan grants, Appraisal Economics Inc. also performs quarterly computations to estimate the numbers of shares that will be awarded under the plan.
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LONG-TERM INCENTIVE PLAN UNITS (LTIP UNITS) WITH MARKET-BASED VESTING CONDITIONS
Appraisal Economics Inc. has performed a valuation of long-term incentive plan units (LTIP Units) for one of the largest publicly traded real estate investment trusts (REITs). The LTIP Units were granted to employees as equity based compensation and were designed to align the interests of the grantees with company stockholders. The grants have market-based vesting conditions, whereby the LTIP Units will only vest into shares of the company’s common stock if certain total return to shareholder (TRS) targets are met. TRS is a measure of the company’s stock price performance that includes dividends. The LTIP Units have both absolute targets, based on the company’s own TRS performance, and relative targets, based on the company’s TRS performance compared to a peer group of over 100 companies. Our valuation of the LTIP Units accounted for all of these features.
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PRIVATE EQUITY CARRIED INTEREST
Appraisal Economics Inc. has conducted a valuation of carried interest of a private equity firm for litigation support purposes. This high profile case was tried in Federal District Court and involved, among other things, the defendant’s First Amendment rights and allegations against the third largest pension fund in the United States. In addition to determining the value of the carried interest for several private equity funds, we determined the value of the management company and the general partner entities, and damages for lost compensation and lost management fees.
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