Kanaryan, Nigokhos

Kasarova, Violeta

New Bulgarian University Scholar Electronic Repository

INVESTMENT VALUE VS. MARKET VALUE IN THE VALUATION OF ASSETS IN ЕMERGING MARKETS  Violeta Kasarova, PhD, New Bulgarian University (Bulgaria)Nigokhos Kanaryan, PhD, New Bulgarian University (Bulgaria)27th BALTIC VALUATION CONFERENCE 27th Oslo, Norway, 24-26 May 2017 ‘Value means nothing until it is defined.  No uniform value exists – assets may havedifferent value in different circumstances'.Shannon Pratt (2006) Type value876543219 № Type value European Valuation standards, TEGoVA, 2016 International ValuationStandards, 20171 Market Value x x2 Equitable Value x x3 Investment Value х х4 Market Rent х5 Synergistic Value x6 Liquidation Value х7 Mortgage Lending Valueх8 Insurable Value х9 Special Value хVALUE DIVERSITY in valuation standards of TEGoVA (2016) and IVSC (2017) In corporate management value is:The main criteria for evaluating the effectiveness of any business activity; Measuring tool of enterprise performance;Factor in seeking new opportunities for growth;Unit of estimation depending on the activity of the market and the behavior of individual investors;Market insight on the benefit that brings the ownership of property at a particular point in time.3Value as a management toolValue is a system forming factor in the new management concept of Value Based Management (VBM) whose essence boils down to maximizing the corporate value in the interests of owners/shareholders. In this concept there are two main types of value: marketing value and investment value.4     Type value European Valuation standards, TEGoVA, 2016  International Valuation Standards, 2017 1 Market Value “The estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without being under compulsion. ” (ЕVS 1) „Market Value is the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion“. (IVS 104.30.1) 2 Investment Value „Investment Value is the value of a property to a particular identified party for investment, owner-occupation or operational purposes.”(ЕVS 2, 6)  „Investment Value is the value of an asset to a particular owner or prospective owner for individual investment or operational objectives“. (IVS 104.60.1)  Fundamental definitions of market value and investment value in valuation standardsComparison criterion Market value Investment valueSubject of valuation A hypothetical investor with business opportunities. Collective vision of market participants about the valueParticular investor (or group of investors) with clearly defined investment goals and intentions. Individual vision of the value taking into account the synergy effect.   Used information Open publicly available market information Information available to the particular investor (or group of investors)Objectivity of valuation  Objective impersonal valuation made in terms of the marketRealistic subjective valuation from the point of view of a particular investor and its parameters: hidden objectives, internal factorsApplication  Determining the most likely selling price for which the object of valuation can be expropriated between a hypothetical seller and a hypothetical buyer Determining the appropriateness of making investments in a particular objectwith a view to gaining income in the future.Taking into account the synergy effect Does not take into account the synergy effect for the potential buyer because of its hypothetic natureTakes into account the synergy effect for the particular investor as a result of combining assetsMethodological approach used Market approach, Income approach Income approach, Cost approachPrerequisites Existence of an open competitive market and absence of exceptional circumstancesNo competition for the asset subject to valuation and existence of exceptional circumstances, for example, criteria that are not typical for the market (motivation, synergy effect, specific rate of return, etc.)5A comparative analysis of investment value and market valueInvestment valueValue of the use of the object of valuationTakes into account the motivation and strategy of a particular investor Considerably more subjectiveReflects the future Market valueMarket exchange value of the object of valuation Takes into account the motivation and perceptions of a particular marketConsiderably more objective under the influence of the marketReflects the presentSubjective value assessment concept Objective value assessment concept 6A comparative analysis of investment value and market valueFor an investor in PACKAGES OF SHARES or REAL ESTATE investment valueis the present value of future benefits, which provide a specific target rate of return at a level of risk acceptable for the investor. Value for a particular investor taking into account the availability of equity, loan use options, lending conditions, management strategies, required rate of return, etc.• Methods of determining investment value: DFCFF, Earn-out Model, Real Options  MethodFor an owner market value of PACKAGES OF SHARES or REAL ESTATE is the present value of the object of valuation naturally formed on the market on the valuation date. It reflects the present on the basis of typical average values of sold objects of the same type. • Methods of determining market value: Method of Market Multiples of Comparable Companies, Method of Market Comparables, Capitalization Method , DEVA, DFCFE 7A comparative analysis of investment value and market value8The investment value is derived by transaction based multiples. It represents the value of an explicit investor and includes premiums/discounts that can be realized only by that investor through various types of synergies. The market value is derived by multiples based on quotes of publicly traded shares. It could includes various types of premiums and discounts, e.g. size effect. It represents the objectives of the portfolio investor.The Income approach is more flexible and can be tailored to the specific conditions and circumstances of a given transaction/acquisition. CAUTION! Slippery Market ApproachKey differences between investment value and market valueInvestment value Market valueKey differences :• In the estimation of future cash flows• In determining the level of risk and the risk factors inherent to the object of valuation. • In the required rate of return• In the level of financial costs • In the synergy effect from a combination with other significant operations, investments or investments in other assets.9Market value > Investment value Market value = Investment value Market value < Investment value This inequality occurs most often on emerging markets. Due to their high volatility, insufficient reliability of information, existence of a beta-dilemma, frequent change of ownership of assets, and other factors, investors determine the value of the asset including a higher level of risk. Equality between the two types of value occur also in cases where the estimated value of the asset is the highest of the reasonably permitted ones for the owner and the lowest of the reasonably permitted ones for the investor. The equality reflects the same benefit for the owner and for the investor.A similar disparity exists in cases where the investor evaluates the asset as part of its production chain, and thus the investment valuation includes a synergy effect as well. Possible relationships between investment value and market value10The market value of a non-public company in Bulgaria calculated by independent valuators as of 31st December 2016 according to the DEVA (Discount Economic Value Added) method in the amount of EUR 11,784,000 for 100% of the equity.The investment value of the same company determined as of 31st December 2016 according to the Earn-out Model by a foreign investor is EUR 6,900,000.The difference between the market and the investment value in this case is caused by the differentmethods used for the valuation, the high level of risk and subjective assumptions, reported by theinvestor in the estimates, as well as by the various strategic visions of the owner and the investorabout the future development of the company.11Case studies from emerging markets A case study from Bulgaria Market value > Investment value  12 In 2005 93.02% of Krivorožstal are bought by Mittal Steel Company-InvestorGermany GMBH (now ArcelorMittal) for USD 4.79 billion. The initial value ofthese shares as determined by independent valuers is USD 1.98 billion.The difference between the investment and the market value is a result of the fact thatindependent valuers determine the market value of Krivorožstal as a separate operatingentity without taking into account the possible synergy effects for potential buyers. Onthe contrary, the investor determined the value of Krivorožstal taking the company aspart of its production chain, evaluating all the additional advantages as a component of abig businessA case study from Russia Market value < Investment valueCase studies from emerging markets Thank You13Nigokhos Kanaryan, PhD, Assistant Professor in New BulgarianUniversity (Bulgaria), Certified Investment Consultant.Violeta Kasarova, PhD, Association Professor in New BulgarianUniversity (Bulgaria), Certified Enterprise Valuer, Certified Real EstateValuer, Certified Valuer of Financial Assets and Financial Institutions.Lecturer on business evaluation.14Violeta Kasarova, PhD, New Bulgarian University, Bulgariae-mail: teklaconsult@gmail.com; vkasarova@nbu.bgNigokhos Kanaryan, PhD, New Bulgarian University, Bulgariae-mail: nkanaryan@nbu.bg, n.kanaryan@gmail.com

Investment value vs. market value in the valuation of assets in emerging markets

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