TIAA - THERE IS AN ALTERNATIVE

Joseph Abramson. CFA, MBA

Co-CIO, Northland Wealth
Management
 Strong intermediate term private market demand:

Why Private • Shift in capital allocation from public to private markets

Equity/Venture • Deflationary pricing for active management in public

markets
Capital? • Solid private market labor demand since very
idiosyncratic and labor intensive
 Venture capital:
• Series A ($5-25M valuation)
• >$1M revenue

Northvest • Proven business model

Positioning Private equity:

• Lower mid-market ($10-30M valuation)
• High cash flow, boring industries
• Potential to add value
 Private Firms Public Firms

Larger size (> access

Smaller size (> risk) to financing)

Private vs Concentrated Diffuse control &

control ownership
Public Firms
Personal tax Less tax
management focus management focus

Illiquidity Greater liquidity

Poorer disclosure & Better disclosure &

acctg quality acctg quality
 • Income Approach: Based on present value of expected
future cash flows
Private • Market Approach: Based on valuation multiples of
Valuation comparables or similar transactions
Methodologies • Asset-based Approach: Based on net asset values
(assets minus liabilities)
 Key steps:
1. Calculate EV/EBITDA multiples from comparables and
similar transactions
Valuation 2. Perform basic free cash flow analysis
Analysis: Key 3. Repeat free cash flow analysis with leverage
Steps 4. Repeat free cash flow analysis with leverage &
synergies
5. Calculate IRR vs. hurdle rate
 Apply EV/EBITDA multiples:

• ID similar transactions & public companies

Step 1: Apply • Make adjustments based on: illiquidity discount,
company size, cyclicality, growth rate, profitability &
EV/EBITDA debt capacity
multiples • Multiply EV/EBITDA multiple to trailing 12 months
EBITDA of target
 Size EV/EBITDA
(Capitalization) Multiple Discount

Public 10.3X

Private (100-
Industrials: 250M+) 7-9X 22%

elative Valuation Private (30-

Multiples 100M+) 6-8X 32%

Private (10-30M+) 4-6X 52%

 Normalizing Earnings:

Normalizing • CEO & family earnings should reflect market conditions

Earnings • Lease rates should be normalized

• Tax items and rates should not reflect personal
preferences
 Basic Free Cash Flow  =
+ Normalized operating earnings (EBIT)
- Interest
Step 2: Basic
- Taxes
Cash Flow
+ Depreciation
Analysis - CAPEX
Step 3 & 4: Step 3: Cash Flow Analysis With Leverage
Free Cash • Incorporate interest costs at optimal debt level
Flow Analysis
Step 4: Cash Flow Analysis With Leverage & Synergies
With Leverage
& Synergies • Incorporate interest costs at optimal debt level
• Incorporate cost savings and revenue enhancements in
model
 IRR - Discount rate that equates present value and future
cash flows (where net present value = 0)

Compare IRR to target rate (usually 17-25%):

Step 5: • Purchase
position
price usually assumes ZERO net debt/cash

Calculate IRR • Purchase price usually assumes normalized working

capital levels
• Calculation usually over 5-year period
Note: Remember to subtract debt from terminal value in
Step 4
THANK YOU