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Q: OK, so the deals are flowing. How do you appraise the value of potential deals offered you? Is it all number-crunching?

A: This brings us to our valuation techniques, which are the most important skills we bring to the table. Our proprietary valuation model has been refined over the years, and we are confident that it produces rational results. In essence, it is a sophisticated cash flow discount model that integrates the economic terms of the partnership agreement with the projected timing, magnitude and risk of the cash flows from the individual companies in the partnership. These discounted cash flows are aggregated together in a bottoms-up approach to develop a purchase price for an individual interest or portfolio. However, this valuation model is a mathematical construct that’s only as good as the assumptions that go into it. Crucial to our arriving at realistic valuations are two analytical tasks we perform: acquiring differentiated information about the companies; and applying seasoned judgment to that information.

Q: Hmmm, “judgments,” “…differentiated information,” …that sounds interesting. Please elaborate.

A: While the valuation model relies on numbers, what is most important is the judgment used in analyzing the information that generates the numbers. It’s how you avoid buying the wrong investments or paying too much for the ones you do buy. Above and beyond our mathematical modeling, we carefully assess the past investment results and reputations of partnership general partners. We also assess the individual companies in a portfolio – their managements, business models, and the health of the market segments they’re in. We’re particularly interested in company managements – whether they’ve had experience in a particular market, whether they’ve had previous success in startups or only worked for large companies. Our best information usually comes from private conversations with personal sources – general partners, other investors in portfolio companies, and investors in similar or competing companies. Once we have gathered sufficient information through our due-diligence process, we apply our judgment, which has been sharpened over many years, to distill the information into practical data for the model. We believe we consistently develop information that our competitors do not have. This information, gained from people who know us and trust our discretion, helps us fill in the “information gaps” that are otherwise inherent to inefficient markets. At Symmetry, these subjective modifications to our valuation model are always done by the Partners, not by junior associates.

Q: Are there other valuation methods that you employ?

A: Since we both have had extensive experience doing direct investments, we also perform a kind of “sanity check” on our valuation models. The model looks at the projected future value of a company, discounted back to a present value. Our “sanity check” considers what a buyer might pay for the company today, as opposed to what we think it’s going to be worth at some future date. In this analysis, we assess factors such as current revenues and profitability, market multiples for similar companies, and stage of development. We compare the two numbers; if they’re far off, either positively or negatively, we know we should revisit our valuation.

Q: Will investment portfolios you acquire typically be already fully invested?

A: We prefer to acquire interests after or close to the expiration of the Investment Period, which is the limited amount of time (usually three to five years) during which newly formed private equity partnerships can add companies to their portfolios. After the Investment Period, the fund can put more money into portfolio companies, but cannot add new ones. So, portfolios we acquire almost always have some “unfunded” component – money committed by investors, but not yet deployed. Because of our previous experience investing in primary funds – funds that haven’t begun investing – we are comfortable appraising a general partner’s ability to invest the remaining money prudently. To the degree that we’re not comfortable with that ability, we’ll reflect that in the risk level assigned to the companies, which in turn determines our offering price – or a decision not to acquire a particular portfolio.

Q: Unlike many secondary market players, you don’t shy away from venture-stage portfolios. Why?

A: Many of our competitors would prefer to purchase interests in buyout funds, rather than venture funds. Their rationale is that they can put more money to work faster because the transactions are larger. In addition, buyout funds invest in more mature businesses, so there is more information available about industry dynamics and competition, which can make the evaluation more objective. In our case, since our personal networks are particularly strong in the venture business, we are very comfortable analyzing early-stage companies.

Q: What about distressed debt and “tail ends”?

A: We’re interested in buying interests in distressed debt partnerships, if the general partners have an impressive skill set. Generally speaking, we’re not interested in private equity funds whose remaining value is dependent on “turnarounds” in their portfolio companies. We’re also interested in “tail ends” – interests in a partnership that has only a few investments remaining. While these can offer intriguing opportunities in certain circumstances, we need to be convinced a general partner will be able to make a successful exit. “Tail ends” can be quite risky due to a simple lack of diversification. As a result, the purchase price might be discounted more heavily than in a situation where a partnership is in the middle of its life. This risk is substantially diminished, though, if a “tail end” is part of a larger portfolio purchase, where there is broader diversification.

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