Mercer Capital's Portfolio Valuation Q3 2021

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Market Tenor
The third quarter is off to a great start for private equity and credit. Public market and
acquisition markets are strong; debt capital is plentiful and available at record low yields.
SPAC IPOs have slowed (~$120 billion YTD) but SPACs have lots of capital to deploy
and have become another liquidity option for VC-backed companies that by-pass a
traditional IPO.
A buoyant environment for harvesting assets at high prices and often high realized
returns creates a virtuous cycle to raise more capital based upon those returns. Argu-
ably investing new capital today at high multiples sets the stage for low returns later, but
the future is unknowable.
We will stay away from generalizations such as VC-backed private companies and
freshly minted public ones are overvalued. Rather, we look to accounting guidance to
marking private equity and credit positions. Fair value has a very specific meaning and
must be measured accordingly; fair value is not the asset owner’s investment thesis.
Fair value is defined in the relevant accounting standards as:
“The price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.”
Accounting definitions notwithstanding, the “exit market” is hot. Robinhood Markets is
a good example. Its July IPO was one of the larger fintech IPOs in which $2 billion was
raised in an IPO that valued the company at $32 billion. A few weeks later the market
cap is nearing $50 billion.
High or not, there is nothing like transaction data to validate valuation marks for
private assets.
In This Issue
The SEC Adopts New Rule 2a-5
for Valuation of Fund Portfolio
Investments 1
Private Credit and Equity 3
Publicly Traded Private Credit 4
Venture Capital 5
About Mercer Capital 7
Portfolio Valuation
Private Equity and Credit
Third Quarter 2021
BUSINESS VALUATION
FINANCIAL ADVISORY SERVICES

Mercer Capital’s Portfolio Valuation Third Quarter 2021
© 2021 Mercer Capital 1 www.mercercapital.com
The SEC Adopts New Rule 2a-5 for Valuation of
Fund Portfolio Investments
Summary
In December 2020, the Securities and Exchange Commis-
sion (“SEC”) adopted a new rule 2a-5 to update the regu-
latory framework around valuations of investments held by
a registered investment company or business development
company (“fund”).1
Boards of directors of funds are obligated
to determine fair value of investments without readily avail-
able market quotations in good faith under the Investment
Company Act of 1940 (“Act”).
Rule 2a-5 specifies requirements to fulfill these obliga-
tions. Concurrently, the SEC also adopted rule 31a-4, which
provides record keeping requirements related to fair value
determinations. Rule 2a-5 was effective as of March 2021,
and funds are required to be compliant upon the conclusion
of an 18-month transition period following the effective date
(voluntary early compliance allowed).
Valuation Framework
Prior to adopting rule 2a-5, the SEC last addressed valua-
tion practices under the Act more than 50 years ago. Over
the intervening period, the variety of securities and other
instruments held by investment funds has proliferated.
The volume and type of data used in valuations have also
increased. Funds increasingly use third-party services to
provide pricing information, especially for relatively illiquid or
otherwise complex assets. In addition, accounting standards
and regulatory requirements have advanced including devel-
opments related to ASC 820, Fair Value Measurement.
Against this backdrop, rule 2a-5 establishes a framework
consisting of four primary functions required to determine fair
value in good faith. A fund board may choose to determine
fair value by executing the functions. Rule 2a-5 also allows
a fund board to designate these functions to a “valuation
designee.” The required functions are:
1. Periodically assess and manage valuation risks,
including conflicts of interest. The rule does not prescribe
a required minimum frequency for re-assessing valua-
tion risks, instead stating that different frequencies may be
appropriate for different funds or risks. Re-assessment of
valuation risks should generally consider changes in fund
investments, significant changes in investment strategies or
policies, market events, and other relevant factors.
2. Establish and apply fair value methodologies. Satis-
fying this function will require selecting and applying appro-
priate valuation methodologies, periodically reviewing the
appropriateness and accuracy of the methodologies (and
making any necessary changes or adjustments), and moni-
toring for circumstances that may necessitate the use of fair
value. A fund board or the valuation designee is required to
specify key inputs and assumptions used in the valuation of
particular asset classes or portfolio holdings. Appropriate
valuation methodologies for investments may vary, even
within the same asset class. However, these methodologies
are expected to be applied consistently to minimize the risks
of selecting methodologies to achieve a specific outcome.
Further, the rule states that appropriate methodologies must
be consistent with the principles outlined in ASC 820.
3. Test fair value methodologies for appropriateness and
accuracy. This function is intended to ensure the selected
valuation methodologies are appropriate and adjustments
are made as necessary. The fund board or the valua-
tion designee should identify the testing methods and the
minimum frequency with which such methods will be used.
However, the rule does not prescribe any particular testing
method or specific minimum testing frequency. Examples
of testing methods include calibration and back-testing
against valuations obtained from observed transactions.
Sujan Rajbhandary, CFA
1
See “SEC Modernizes Framework for Fund Valuation Practices” at https://www.sec.gov/news/press-release/2020-302.
Final rule available at https://www.sec.gov/rules/final/2020/ic-34128.pdf

4. Oversight and evaluation of pricing services. The
fund board or the valuation designee must establish a
process for approving, monitoring, and evaluating pricing
service providers. A process to initiate pricing challenges, as
appropriate, is also required. Pricing services are described
as third parties that regularly provide funds with information
on evaluated prices, matrix prices, price opinions, or similar
pricing estimates or information to assist in determining fair
value of fund investments. The rule discusses the possibility
of conflicts of interest on the part of the pricing services,
arising from the need to maintain continuing business rela-
tionships with the fund board or valuation designee. Accord-
ingly, the oversight function is intended to ensure the fund
board or the valuation designee has a reasonable basis to
use the pricing information it receives as inputs in performing
valuations.
Valuation Designees
When fair value determinations are made by a valuation
designee, which can be the fund adviser or an officer of an
internally managed fund, the board is required to actively
oversee the valuation designee’s work and compliance with
the rule. In general, rule 2a-5 limits possible designees to
entities that have a fiduciary duty to the fund. While the
adviser may have some conflicts, the fiduciary obligation to
the fund would ensure that the valuation designee acts in the
fund’s best interest and mitigates or discloses conflicts. The
rule states that fund boards should approach oversight of the
valuation designee’s work with a skeptical and objective view
that considers valuation risks, the appropriateness of the
valuation process, and the skill and resources devoted to the
endeavor. In order to assist the fund board in its oversight
function, a valuation designee is required to present both
annual and quarterly written reports to the board.
Quarterly reports should include:
• Items requested by the board related to the fair
value of investments or the valuation process.
• A summary or description of material fair value
matters that occurred in the prior quarter,
including any significant changes in valuation
risks, fair value methodologies, and the process
for selecting and overseeing pricing services.
Annual reports should include:
• An assessment of the valuation process, including
a summary of the results of the testing of fair value
methodologies.
• An assessment of the adequacy of resources
allocated to the valuation process.
In addition to periodic reporting to the fund board, the valu-
ation designee is required to state the titles of the persons
responsible for the valuation of portfolio investments. The
valuation designee should also reasonably segregate fair
value determinations from the portfolio management of the
fund so that the portfolio manager does not determine or
exert influence on the valuation of portfolio investments.
Conclusion
Rule 2a-5 updates decades-old valuation guidance from the
SEC for investment funds. Fund boards have the primary
responsibility to adhere to the valuation framework outlined
in the rule. When a valuation designee performs these func-
tions, active oversight is required by the board. The rule
prescribes a framework that emphasizes understanding and
managing risks around conflicts of interest and promotes
a principles-based valuation regime that aligns with recent
accounting and regulatory developments, notably ASC 820.
Mercer Capital provides portfolio valuation services for
private equity firms, business development companies, and
other financial sponsors.
sujanr@mercercapital.com | 901.322.9749

Private Credit and Equity
Equity Valuation: EBITDA Multiples Over Time
The expansion in the EBITDA multiple of non-financial companies in the SP 500 to nearly 16x the past several quarters
reflects a combination of an increase in stock prices and depressed trailing 12 month EBITDA. The same is true for the
small-cap Russell 2000 index at over 12x. As of June 30 the SP multiple was 122% of the Russell 2000 multiple compared
to the 10-year average of 112%. GF Data ® for multiples paid by private equity firms for companies with an enterprise value
of $10 million to $250 million is not yet available for the second quarter; however, given improving economic conditions and
buoyant markets, we suspect the multiple will be above 7x compared to a ten-year range of 6.0x to 8.0x. During the past ten
years the Russell 2000 EBITDA multiple has averaged 153% of the GF median buy-out multiple, which equates to 8.4x based
upon the Russell’s 12.9x multiple as of June 30.
Debt Investments: High Yield Spreads by Credit Rating
The rally in spreads continued in 2Q21 as would be expected given the strong economic backdrop. The OAS spread for
CCC-rated bonds (“triple hooks”) narrowed 73bps to 5.77% while B-rated bonds saw OAS narrow 18bps to 3.49% and
BB narrowed 35bps to 2.16%. All spreads widened modestly during July when financial markets were choppy. Notably,
the yield on BB- and B-rated high yield bonds is below the current inflation rate as measured both by the CPI and PCE.
-
2x
4x
6x
8x
10x
12x
14x
16x
18x
3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 3Q20 1Q21
SP500 R2000 GF Data® ($10-250M EV PE Deals)
Source: Capital IQ, GF Data®
-
2
4
6
8
10
12
14
16
18
20
J
u
l
-
1
9
A
u
g
-
1
9
S
e
p
-
1
9
O
c
t
-
1
9
N
o
v
-
1
9
D
e
c
-
1
9
J
a
n
-
2
0
F
e
b
-
2
0
M
a
r
-
2
0
A
p
r
-
2
0
M
a
y
-
2
0
J
u
n
-
2
0
J
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l
-
2
0
A
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g
-
2
0
S
e
p
-
2
0
O
c
t
-
2
0
N
o
v
-
2
0
D
e
c
-
2
0
J
a
n
-
2
1
F
e
b
-
2
1
M
a
r
-
2
1
A
p
r
-
2
1
M
a
y
-
2
1
J
u
n
-
2
1
Option
Adjusted
Spread
(%)
CCC Below B BB
Source: BofA Securities via FRED

Price / NAV for Publicly Traded Business Development Companies
Publicly Traded Private Credit
BDC prices continued to rebound in 2Q21 and into July when the median BDC P/NAV was 99% and the market cap
weighted multiple was 113%--valuations that were last recorded at year-end 2019 when the median P/NAV was 96%
and market cap weighted multiple was 109%.
40
50
60
70
80
90
100
110
120
7
/
2
8
/
2
1
2
0
2
1
Q
1
2
0
2
0
Q
3
2
0
2
0
Q
1
2
0
1
9
Q
3
2
0
1
9
Q
1
2
0
1
8
Q
3
2
0
1
8
Q
1
2
0
1
7
Q
3
2
0
1
7
Q
1
2
0
1
6
Q
3
Median BDC P/NAV (%) Market Cap Weighted BDC P/NAV (%)
Source: SP Global
Stock Performance for Publicly Traded PE Sponsors:Total Returns (Trailing Twelve Months)
The March 2020 panic looks like a speed bump in hindsight given strong market gains since then as a result of easy
money from the Fed and strong corporate earnings attributable to a reopening of the economy. PE firms as a group have
outperformed the SP 500 because the operating environment has been favorable to harvest significant gains and to
raise new capital to invest on which asset management fees are generated.
-100
-50
0
50
100
150
Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21
Total
Return
(%)
SP 500 PE Firms BDC Group
Source: SP Global MI

Venture Capital
U.S. VC-Backed Funding Activity
2Q21 venture funding was little changed from 1Q21 at ~$75 billion; both were significant records relative to the past several
years when quarterly fundings ranged from $20 billion to $40 billion. The average funding per transaction increased to
$23 million from $20 million in 1Q21, $14 million in 4Q20 and $16.7 million in 3Q20.
0
800
1,600
2,400
3,200
4,000
$0
$10
$20
$30
$40
$50
$60
$70
$80
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2017 2018 2019 2020 2021
$ billions
Deal value # of Deals Closed Angel/Seed Early VC Later VC
Source: Pitchbook/NVCA Venture Monitor
BDC yields have fallen by about 50% from the March 2020 panic highs to about 8% as of late July 2021. Yields are
comparable to 2013 and 2014 when the economy had largely recovered from the GFC yet short-term rates like today
were near zero.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
7
/
2
9
/
2
1
2
0
2
1
Q
1
2
0
2
0
Q
3
2
0
2
0
Q
1
2
0
1
9
Q
3
2
0
1
9
Q
1
2
0
1
8
Q
3
2
0
1
8
Q
1
2
0
1
7
Q
3
2
0
1
7
Q
1
2
0
1
6
Q
3
Median BDC Yield (%) Market Cap Weighted BDC Yield (%)
Source: SP Global
Long-Term Dividend Yield Trend

Whether transitory or a new paradigm, venture-backed companies have seen a surge in the median capital raise based
upon data through mid-year 2021 that ranged from 22% for angel investments to 60% for late-stage raises. Capital markets
that are exceptionally receptive to IPOs and SPAC-enabled MA provide a favorable environment for VC capital raises
given (current) prospects for favorable exits.
$0.61
$9.5
$16
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
$ millions
Angel Seed Early VC Later VC
Median Funding by VC Stage ($ millions)
U.S. VC-Backed Exit Activity
2Q21 VC-backed company exits reflected a record $241 billion of value, roughly double near record exits recorded in
4Q20 and 1Q21. The July 2021 IPO of Robinhood Markets in which the company raised $2 billion and realized a value of
~$35 billion ensures that third quarter will be robust, too. The amounts are stunning though it is unknowable how much is
attributable to the Fed’s easy-money policies with short-term policy rates near zero and how much is attributable to new
technologies and business models that should be highly valued even in the absence of current profitability.
0
80
160
240
320
400
$0
$60
$120
$180
$240
$300
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2017 2018 2019 2020 2021
$ billions
Exit Value # of Exits Closed

Copyright © 2021 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media
quotations with source attribution are encouraged. Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Portfolio
Valuation is published quarterly and does not constitute legal or financial consulting advice. It is offered as an information service to our clients and friends. Those interested in specific guidance for
legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list to receive this complimentary
publication, visit our web site at www.mercercapital.com.
Mercer
Capital
Private Equity Firms
Other Financial Sponsors
Contact Us
Mercer Capital provides business valuation and
financial advisory services to private equity firms
and other financial sponsors.
Mercer Capital is a valuation and transaction advisory firm. Over four decades we have
valued tens of thousands of equity and credit investments in virtually every industry and
sub-industry grouping that exist in a variety of markets. We also have significant MA
experience. Please call if we can assist in the valuation of your portfolio companies
Services Provided
• Portfolio Valuation
• Solvency Opinions
• Fairness Opinions
• Purchase Price Allocations
• Goodwill Impairment
• Equity Compensation / 409(A)
• Buy-Sell Agreement Valuations
Contact a Mercer Capital professional to discuss your needs in confidence.
Jeff K. Davis, CFA
615.345.0350
jeffdavis@mercercapital.com
901.322.9749
sujanr@mercercapital.com
J. David Smith, ASA, CFA
832.432.1011
smithd@mercercapital.com
Bryce Erickson, ASA, MRICS
214.468.8400
ericksonb@mercercapital.com
Heath A. Hamby
615.457.8723
hambyh@mercercapital.com
Mary Grace Arehart, CFA
901.322.9720
arehartm@mercercapital.com
MERCER CAPITAL www.mercercapital.com
BUSINESS VALUATION
FINANCIAL ADVISORY SERVICES

Mercer Capital's Portfolio Valuation Q3 2021

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