Deloitte Valuation Conference

Transcription

1 Deloitte Valuation Conference Valuation for Incentive Plans October 2015 January Deloitte Tax & Consulting 1

2 Introduction Facilitators Pierre Masset Partner - Corporate Finance Advisory Tel: Mobile: Mail: pmasset@deloitte.lu Pierre Jean Estagerie Partner - Tax Tel: Mobile: Mail: pjestagerie@deloitte.lu Romain Raimbault Senior Manager - Corporate Finance Advisory Tel: Mobile: Mail: rraimbault@deloitte.lu 2015 Deloitte Tax & Consulting 2

3 Conference Agenda 2015 Deloitte Tax & Consulting 3

4 Content 1. Regulations 2. Taxes 3. Waterfall Economics 4. Valuation 5. Conclusion 2015 Deloitte Tax & Consulting 4

5 Remuneration Principles What to whom? Banks 2013/36/EU (CRD IV) CSSF 10/496 (CRD III) CSSF 11/505 (PP) CSSF 14/594 (DR) CSSF 15/601 (notification of increased 1:1 ratio) Specialized Investment Firms CSSF 10/437, however, the CSSF is under no obligation to monitor and/or control its effective implementation Investment Firms (PSF) CSSF 10/437 CSSF 10/497 (CRD III) CSSF 11/505 (PP) CSSF 14/594 (DR) CSSF 15/601 (notification of increased 1:1 ratio) CSSF 14/585 (MiFID) is applicable to all those providing investment services of individual portfolio management or non-core services AIFMs 2011/61/EU ESMA 2013/232 OPCVM 2009/65/EU (UCITC IV) 2014/91/EU (UCITS V) Support Investment Firms No obligation to conform to specific remuneration policies and procedures 2015 Deloitte Tax & Consulting 5

6 Remuneration Principles Overview Objectives Risk alignment and avoid excessive risk taking Remuneration in its broadest meaning Scope All staff «Identified Staff» Material impact On risk profile General requirements Governance Transparency Risk management Specific requirements Proportionality principle 2015 Deloitte Tax & Consulting 6

7 Remuneration Principles General requirements All staff 1 Guaranteed bonuses should be exceptional, must only occur when hiring new staff and be limited to the first year 2 Severance payments must not reward failure 3 Employees must undertake not to use personal hedging strategies 4 Discretionary pension benefits must be paid in instruments and be subject to a retention period of at least five years 2015 Deloitte Tax & Consulting 7

8 Remuneration Principles Specific requirements Identified Staff Members of the AIFM governing body (both executive and non-executive) Senior management 1 2 Appropriate balance between fixed and variable remuneration Control functions Payment in instruments (at least 50%) Staff heading up administration, marketing, HR, etc. 3 Deferral (40% to 60% to be deferred over a minimum period of 3 to 5 years) Risk takers Other staff with same total remuneration as persons listed above 4 Malus / claw back (on variable remuneration) 2015 Deloitte Tax & Consulting 8

9 Remuneration Principles Identified Staff Payout process - Example EUR 100,000 Cash (20%) Instruments (20%) Cash (30%) ,000 20,000 10,000 10,000 10,000 Instruments (30%) 10,000 10,000 10, Deloitte Tax & Consulting 9

10 Remuneration Principles Governance Avoidance of conflict Governance Structure Supervision of interest Decreased risk taking Establish a remuneration policy Remuneration policy Shall be reviewed at least annually and updated when necessary Supervisory function Shall rely on controls performed internally Carried out by relevant persons or bodies, in order to avoid conflict of interest Could be performed by the management body depending on the AIFM s size Remuneration Committee Composed of non-executive members of the management body For entities which are part of greater groups, they might rely on the groups RemCo 2015 Deloitte Tax & Consulting 10

11 Remuneration Principles Disclosures Total fixed and variable remuneration paid to all staff External Aggregated remuneration for identified staff Impact on the current organizational structure and business practice of the non-ucits sector Details of remuneration policy and processes, including governance Internal Remuneration policy available to all staff 2015 Deloitte Tax & Consulting 11

12 Remuneration Principles Proportionality Payment of variable remuneration in 1 Size instruments Retention periods 2 Nature, scope and complexity Disapplication of Impact on the current organizational structure and business practice of the non-ucits sector Deferral requirements Malus / claw back 3 Internal organization Remuneration committee 2015 Deloitte Tax & Consulting 12

13 Content 1. Regulations 2. Taxes 3. Waterfall Economics 4. Valuation 5. Conclusion 2015 Deloitte Tax & Consulting 13

14 Acquisition structure Example of structure UK / US GP or Advisory Co LP GP LPs LP Jersey/Guernsey partnership Economic substance/rationale? Lux SPV Dutch SPV Lux SPVs Local Target 1 Local Target 2 Local Target 2015 Deloitte Tax & Consulting 14

15 Acquisition structure Set up of a business platform Advisory Co LP Investment Advisory Services Carried interest Lux ManCo Sarl (AIFM) GP LPs Conduct of business in Luxembourg Management Services / GP interests VAT Exempt LUX LP AIF (Lux SCSp) (unregulated or regulated SIF) Lux Masterco MEP/MIP Lux SPV 1 Lux SPV 2 Lux SPV # Local Target 1 Local Target 2 Local Target # 2015 Deloitte Tax & Consulting 15

16 Acquisition structure MEP/MIP Tax optimisation LUX LP MEP/MIP vehicle Corporate tax Location of pooling vehicle Repatriation mechanism Lux SPV 1 Lux Masterco Lux SPV 2 Lux SPV # Tax influencing factors Personal tax Capital gain vs. Employment income Country of employment/residence Legal form of the award (shares, options, etc.) Award acquisition price (FMV, nom. value, zero cost) Vesting Local Target 1 Local Target 2 Local Target # Good and bad leaver provisions 2015 Deloitte Tax & Consulting 16

17 Acquisition structure Carried interest Tax optimisation Tax influencing factors Corporate tax Personal tax Transfer pricing considerations Repatriation mechanism Capital gain vs. Employment income Country of employment/residence Carried interest regime (or not) Carry acquisition price (FMV, nom. value, zero cost) Investment Advisory Services Carried interest Advisory Co Management Services / GP interests VAT Exempt Lux ManCo Sarl (AIFM) GP LP LPs LUX LP Vesting Good and bad leaver provisions 2015 Deloitte Tax & Consulting 17

18 Content 1. Regulations 2. Taxes 3. Waterfall Economics 4. Valuation 5. Conclusion 2015 Deloitte Tax & Consulting 18

19 Waterfall economics Overview WHAT? PE/RE investments WHY? Allocation of sale proceeds / value created HOW? Waterfall Asset Value Q: How are allocated sale proceeds upon exit? What s next? Waterfall main features Other components Value at entry Value at exit 2015 Deloitte Tax & Consulting 19

20 Content 1. Regulations 2. Taxes 3. Waterfall Economics 3.1. Waterfall main features 3.2. Other components 4. Valuation 5. Conclusion 2015 Deloitte Tax & Consulting 20

21 Waterfall economics 3.1. Main features Simple target allocation principles Target allocation results from negotiation between shareholders and managers: e.g. 80%/20% Increase in EBITDA/financials Increase in multiples Impact of bolt-on acquisitions Debt reimbursement Value at entry Value at exit Capital reimbursement Allocation rule Cash flows towards shareholders Cash flows towards managers Allocation 2015 Deloitte Tax & Consulting 21

22 Waterfall economics 3.1. Main features Slightly more complicated in practice 1- Capital Reimbursement Reimbursement of capital injected 2- Preferred return Minimum return on investment expected on capital Usually expressed in CoC and/or % return per year 3- Catch-up Up to step 2, proceeds have only been distributed to shareholders/lps Step 3 allows for managers/gps to catch-up on gains 4- Allocation rule Remaining sale proceeds are shared between shareholders/lps and managers/gps Usually proportionate allocation rule is used Clawback & Vesting Additional rules aimed at: i) ensuring the proper allocation of gains ii) retaining key management Gains/Value creation allocation 2015 Deloitte Tax & Consulting 22

23 Waterfall economics 3.1. Main features How sale proceeds are allocated? What if value created is larger? Increase in EBITDA/financials Increase in multiples Impact of bolt-on acquisitions Debt reimbursement Allocation of sale proceeds Cash flows towards shareholders Cash flows towards managers Proportionate and same step Proportionate but separate steps 80% 20% Value at entry Value at exit -1- Capital payment -2- Preferred return -3- Catch-up phase -4- Profit sharing 80/ Deloitte Tax & Consulting 23

24 Waterfall economics 3.1. Main features How sale proceeds are allocated? Impact of a change in sale proceeds Cash flows towards shareholders Cash flows towards managers 4- Allocation 20/80 Allocation 3- Catch up 2- Preferred return 1- Capital repayment Value at entry Value at exit Value at exit Time 2015 Deloitte Tax & Consulting 24 T

25 Waterfall economics 3.1. Main features How sale proceeds are allocated? Impact of a change in exit date Allocation of sale proceeds Cash flows towards shareholders Cash flows towards managers Despite waterfall occurs only once, upon exit allocation of value is dynamic as preferred returns are time dependant 4- Allocation 20/80 3- Catch up 4- Allocation 20/80 2- Preferred return 3- Catch up 2- Preferred return 1- Capital repayment 1- Capital repayment Value at entry Value at exit Value at exit Value at exit 2015 Deloitte Tax & Consulting 25 Time

26 Content 1. Regulations 2. Taxes 3. Waterfall Economics 3.1. Waterfall main features 3.2. Other components 4. Valuation 5. Conclusion 2015 Deloitte Tax & Consulting 26

27 Waterfall economics 3.1. Other components Vesting Right to share gains is progressively acquired over time, e.g. 20% of the plan vests at each anniversary of the grant date Good leaver Any person who leaves the company because of retirement, disability, death, is dismissed for economic reasons, etc. Bad leaver Any person who resigns, is dismissed (for gross misconduct), etc. Claw back Participants might be obliged to reimburse (part of) their payments upon occurrence of predefined events (e.g. claims from third parties, etc.) 2015 Deloitte Tax & Consulting 27

28 Content 1. Regulations 2. Taxes 3. Waterfall Economics 4. Valuation 5. Conclusion 2015 Deloitte Tax & Consulting 28

29 Valuation Introduction Waterfall Tax structuring Legal doc. Valuation Underlying s specificities Incentive beneficiaries /givers Fund s specificities Equilibrium Structuring an incentive plan results in finding the right equilibrium through discussions with many different parties What s next? 1) What is an option and what drives its value? 2) Find the appropriate valuation methodology? 3) Valuation process 2015 Deloitte Tax & Consulting 29

30 Content 1. Regulations 2. Taxes 3. Waterfall Economics 4. Valuation 4.1. What is an option and what drives its value? 4.2. Find the appropriate valuation methodology? 4.3. Valuation process 5. Conclusion 2015 Deloitte Tax & Consulting 30

31 Valuation 4.1. What is an option and what drives its value? Definition Parameters Options are contracts through which a seller gives a buyer the right, but not the obligation, to buy or sell a specified number of shares at a predetermined price within a set time period. Source: Nasdaq σ So K T Option to purchase/sell a stock at price K at time T knowing that: current stock price is S0 volatility of the stock is σ 2015 Deloitte Tax & Consulting 31

32 Valuation 4.1. What is an option and what drives its value? σ Volatility Let s consider A call, i.e. right to purchase at price K with K=S 0 Volatility is a measure of dispersion S 0 K The more volatility, the more dispersed will be the future price of a stock An option has always a positive value t = 0 t = T Therefore as volatility increases, so does the option value 2015 Deloitte Tax & Consulting 32

33 Valuation 4.1. What is an option and what drives its value? T Timing Let s consider A call, i.e. right to purchase at price K with K=S 0 T is the date at which the option can be exercised S K The longer the timing, the more dispersed will be the future price of a stock Therefore as the timing increases, so does the option value t = 0 t = 1 t = 2 t = Deloitte Tax & Consulting 33

34 Valuation 4.1. What is an option and what drives its value? K Strike Price Let s consider A call, i.e. right to purchase at price K with K=S 0 K is the price at which the stock can be purchased at time T S 0 K2 K Let s increase K from K1 to K2 The higher the strike price, the less dispersed will be the payoff of the option t = 0 t = T Therefore as strike price increases, the option value decreases 2015 Deloitte Tax & Consulting 34

35 Valuation 4.1. What is an option and what drives its value? Link between incentive plans and options? Cash flows towards shareholders Cash flows towards managers Allocation σ 4- Allocation 20/80 3- Catch up K So 2- Preferred return 1- Capital repayment Value at entry Value at exit T Time 2015 Deloitte Tax & Consulting 35

36 Content 1. Regulations 2. Taxes 3. Waterfall Economics 4. Valuation 4.1. What is an option and what drives its value? 4.2. Find the appropriate valuation methodology? 4.3. Valuation process 5. Conclusion 2015 Deloitte Tax & Consulting 36

37 Valuation 4.2. Find the appropriate valuation methodology? 3 main valuation methodologies used Black & Scholes formula Binomial approach Monte Carlo approach c = S rt N( d1) K e N( 2) 0 d Source: John C. Hull Increased Tailoring/Increased Flexibility Increased Simplicity 2015 Deloitte Tax & Consulting 37

38 Content 1. Regulations 2. Taxes 3. Waterfall Economics 4. Valuation 4.1. What is an option and what drives its value? 4.2. Find the appropriate valuation methodology? 4.3. Valuation process 5. Conclusion 2015 Deloitte Tax & Consulting 38

39 Valuation 4.3. Valuation process 1 Fund structure understanding 2 Waterfall understanding Holding structure Debt repayment Level at which plan is put in place Preferred return: usually 10% to 20% p.a. depending on underlying volatility Catch-up: not always included Allocation rule: fixed or variable (depending on CoC, EBITDA, ) 3 Value of underlying Business plan/historical financials necessary Usually done using different methodologies: DCF, trading/transaction multiples 4 Option parameters Volatility (σ): usually 30%-40% for MEP/MIP, 10%-20% for carry (diversification) Maturity (T): usually 4-6 years Strike (K): corresponds to +/- to preferred returns (usually at least at 2.0x underlying val.) 4 Option methodologies Black & Scholes: necessity to simplify waterfall using combination of calls/puts Monte Carlo: necessity to model fund and waterfall cash flows Option value? Very dependant on structuring of the fund and plan 2015 Deloitte Tax & Consulting 39

40 Content 1. Regulations 2. Taxes 3. Waterfall Economics 4. Valuation 5. Conclusion 2015 Deloitte Tax & Consulting 40

41 Conclusion Underlying valuation Fund structure Tax Waterfall parameters Regulatory Incentive plan Valuation methodologies 2015 Deloitte Tax & Consulting 41

42 Q&A 2015 Deloitte Tax & Consulting 42

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