ALTLOOK: Valuation Quarterly
Update—December 2023
December 7, 2023

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Today’s
Agenda

1. Technology Update
2. New Regulation
3. Macro-economic Update
4. Valuation Hot Topics/Questions

3

Speaker’s Introduction

Jenetta Mason
Jenetta Mason is a managing director in the Chicago office and is part of the Portfolio Valuation group within
Valuation Advisory Services practice. She specializes in the valuation of illiquid interests, investments andportfolios for private equity funds and hedge funds. Jenetta has performed valuations for global publicly tradedand privately held clients across various industries, including consumer and industrial products, technology,
healthcare, retail and many others.
Additionally, Jenetta has extensive experience encompassing the valuation of intangible assets, business interests,
capital stock, partnership interests, and financial assets in connection with business combination decision support,
financial reporting, corporate and estate tax planning and compliance, and dispute analysis.

Managing Director

Prior to joining Kroll, Jenetta was a director in the Valuation Services group at Grant Thornton LLP and was alsopart of the firm’s subsidiary Grant Thornton Financial Advisors LLC, which is in the business of providing fairness
opinion services.

Portfolio Valuation

Jenetta received her Bachelor of Science in accounting from Miami University.

Kroll
Chicago+1 312 697 4949
Jenetta.Mason@kroll.com

5

Lea Carty
Lea Carty joined the newly formed Kroll Digital Services in 2022, to focus on the development andcommercialization of company credit-related data and analytics.
Prior to Kroll, Lea led the Investment Solutions Group at the London Stock Exchange Group, the credit decision
support effort at ZAIS Group LLC, a specialist corporate credit hedge fund and CLO manager, and the Buyside
Solutions Group of Bloomberg LP. While at Bloomberg, he also served as an executive director of Bloomberg
Index Services, Ltd.

Managing Director
Private Capital Markets
Kroll

Prior to Bloomberg, Lea was a Managing Director in Lehman Brothers’ Research department, focused on portfolio
and index analytics capabilities. Before Lehman, Lea was a Managing Director with Moody’s Investors Service
where he led the quantitative bond default research effort and took a leading London-based role in theestablishment of a new business unit – Moody’s Risk Management Services (later Moody’s KMV), which served as
the analytic nucleus of what is now Moody’s Analytics.
Before Moody’s, Lea held positions with Bear Stearns, NY and Thomson-CGR, Paris and is currently a nonexecutive director of Credit Research Data Ltd in London. He holds degrees in French, Mathematics andEconomics and has published research in the areas of credit risk, economic history, and credit market structure, in
academic journals, professional journals, and books.

New York+1 212 833 3432
Lea.Carty@kroll.com

6David Larsen
David Larsen is a managing director in the Alternative Asset Advisory practice, based in Seattle, Washington. He has morethan 37 years of transaction and accounting experience. He specializes in fair value accounting, specifically for valuation,accounting and regulatory issues faced by alternative asset managers and investors.
David advises leading private equity managers and institutional investors and has advised numerous strategic and private
equity acquirers in all areas of mergers, acquisitions, joint ventures, divestitures and valuation-related matters.
Prior to joining Kroll (formerly Duff & Phelps), David was a Partner in KPMG’s Transaction Services practice, where he was
the segment leader of KPMG’s U.S. Institutional Investor practice. He served for 13 years in KPMG’s Seattle, Düsseldorf andPrague audit practices before moving full time to advisory work.

Managing Director
Alternative Asset Advisory
Kroll
Seattle+1 415 693 5300
David.Larsen@kroll.com

David advises leading private equity managers and institutional investors and has advised numerous strategic and private
equity acquirers in all areas of mergers, acquisitions, joint ventures, divestitures and valuation-related matters. He provides
valuation policy and process assistance to a number of the world’s largest institutional limited partner investors and some of
the world’s largest alternative investment managers.
David is a member of the International Valuation Standards Council (IVSC) Standards Review Board, an advisor to and has
served as Vice Chair of the International Private Equity and Venture Capital Valuations Board (IPEV), which in 2018 released
updated its International Private Equity Valuation Guidelines, and serves as a member of the American Institute of Certified
Public Accountants (AICPA) PE/VC Practice Guide Task Force. David’s past professional affiliation and advisory experience
includes serving as a special advisor to the Institutional Limited Partners Association; board member, project manager andtechnical advisor to the Private Equity Industry Guidelines Group and was instrumental in developing and drafting the Private
Equity Industry Guidelines Group’s Valuation and Reporting Guidelines; member of the Financial Accounting Standards
Board’s Valuation Resource Group responsible for providing the board with input on potential clarifying guidance on issues
relating to the application of the principles of FASB ASC Topic 820, Fair Value Measurements; and a member of the AICPANet Asset Value Task Force.
David received an M.S. in accounting from Brigham Young University’s Marriott School and his B.S. in accounting from
Brigham Young University. He is a Certified Public Accountant licensed in California and Washington. David is a CEIV
credential holder, is a member of the AICPA and the California and Washington Society of Certified Public Accountants andis a FINRA Series 7, 24 and 63 registered representatives.
7

Peter Salvatori
Peter Salvatori is a managing director in the Miami office and is part of the Portfolio Valuation service line. Peter’s
expertise focuses on portfolio valuation, as well as transaction-related valuations. He has more than 19 years offinancial and valuation experience.
Peter specializes in advising a wide range of alternative asset managers, including hedge funds, private equity
funds, and business development companies on valuing their positions in loans, subordinated and mezzanine debt,
convertible debt, and common and preferred equity. Peter also has extensive experience in executing valuations ofbusinesses and their underlying securities for tax, financial reporting, and strategic planning purposes, as well as
performing decision support analyses for transactions under consideration.

Managing Director
Portfolio Valuation

Prior to joining Kroll, Peter was a senior portfolio analyst at a hedge fund specializing in direct private investments.
There, he was responsible for monitoring and valuing the firm’s portfolio companies and their underlying securities
across a broad range of industries including media and telecom, financials, real estate, and hotels and gaming.
Peter has a B.S. in finance from the University of Vermont. He is also a Chartered Financial Analyst (CFA), and is amember of the CFA Institute and CFA Society New York.

Kroll
Miami
+1 973 775 8263
Peter.Salvatori@kroll.com

8

1. Technology Update

Kroll Digital Solutions• Document Portal• Debt Valuation Portal• Equity Valuation Portal (2024)

10

2. New Regulation

Regulatory Environment• IVSC Approves Update to International Valuation Standards• SEC Releases Examination Priorities• Public Business Entities Must begin applying the amendments to ASC Topic 820

123. Macro-economic UpdatePrivate Credit Market Overview
Kroll Valuation Platform• Augmented to incorporate a beta release ofbenchmarking capabilities• If you don’t have access already, please reach out
Yields• Yield-to-Maturity• Sr Lending is a broad benchmark of USD-denominated,senior and secured term loans• 2L Lending is a similar collection of loans, but withsecond liens• The fair value-weighted YTM of Sr Lending has increased
19bps since the end of July to reach 11.59% at the end of
October• 2L aggregate YTM remained flat at 13.92% over the same
period14

Private Credit Market Yields & Spreads
Sector Yields• Yields vary by sector, holding constant the seniority andsecurity• For senior, first lien loans:– Industrials have the lowest yields, 11.46%– Information Technology have the highest, 12.66%
Spreads• Spread: difference between a loan’s yield-to-maturity
and the swap rate at the equivalent-maturity• Sr Lending’s spreads have come in from wider levels in
Q2, but there has only been a small 2bps gain since Julyto 722bps.
• Second lien loans, on the other hand, have tightened
significantly, by 86bp, since the end of July, to 834bps.

15

Private Credit Market Sector Spreads and Fundamentals
Sector Spreads• Focusing on Sr Lending for comparability• Information Technology sector has widened 27bp since
the end of July, to 795bp.
• Industrials, over the same period, have tightened by 3bp
to 689bp

Sector Fundamentals• Interest Coverage in this context is the ratio of EBITDA to
Interest Expense• Information Technology, which has wider spreads thanIndustrials, also has lower earnings coverage of interest

16

New Issues
New Issue Spreads• Last quarter, we highlighted that new issues werespreading above the stock of outstanding loans. Thispattern persists.
• For Sr Lending at the end of October:•Median New Issue spreads were 800bps•

Outstanding spreads were 714bps

Sectors• New issuance has been uneven across sectors• The two largest sectors of Sr Lending – including thehighest spreading sector, Information Technology –represent an even greater portion of originations over thelast 3 months• However, originations for the next two largest sectors of
Sr Lending – including the lowest spreading Industrials
sector – are a dramatically lower portion of new issuance.

17

New Issues Activity
Primary Market Activity• Originations continue, but are below long run averagelevelsSenior Lending Maturity Profile• The median maturity of Sr Lending outstandings isabove 4 years• Only about 20% of Sr Loan outstandings are due
within 3 years

18Trends in Valuations• Valuations continue to recover from the dip thatbegan with the fed’s rate hikes and the associatedfears of a “hard landing”• Sr Lending’s median % of Par increased 50 bps in thethree months since July, to 99.000%• The analogous increase for 2L Lending has been
38bps, bringing that benchmark’s median to99.126%.

19

Highlights - Economies
US• The October CPI report was softer-than-expected as both headline and core CPI came in below consensus expectations.
— Headline CPI was little changed on the month (+0.04% unrounded). As a result, the y/y rate fell five-tenths to 3.2%, its lowest reading sinceJune 2023.
— Core inflation rose by 0.2% m/m, which was below consensus expectations for a 0.3% increase. This resulted in the y/y rate falling twotenths to 4.0%.
• Growing consensus that Fed is done with its current tightening cycle.
• Consumer spending is expected to slow in coming quarters, but it should continue to be buoyed by a solid labor market.
— Balance sheets are generally healthy. Most homeowners have been shielded from the brunt of Fed hikes because they are locked into low
fixed-rate 30-year mortgages• Labor demand is expected to weaken in the first half of 2024.
— Recent job growth has been driven by a handful of laggard sectors – education & health, leisure & hospitality, and the public sector.
China• Economic growth slowed sharply in 2Q, triggering doubts on the future growth trajectory in the absence of meaningful stimulus.
• Since mid-August, incremental policy easing, including policy rate reductions, down-payment ratio and mortgage rate cuts, relaxation of homepurchasing curbs and eventually an increase in fiscal deficit, gradually kicked in to cushion the downturn.
U.K.
• Inflation has come down sharply (4.6% through Oct), below the government’s target of 5% by year end.
• Slowing core inflation combined with signs of a loosening labor market and weaker growth many expect the BoE to hold the current rate of
5.25% well into next year.
Europe• Euro zone inflation eased to 2.4% in November from 2.9% in October, well below expectations for a third straight month.
20

Public Equity Performance21

Credit Market Performance – US

22

Commodities

23

Highlights – Key Asset Classes
 Private Capital Markets• Loan spreads have remained relatively constant in Q4 and YTD.
— Momentum, however, appears to be shifting.
• LBO purchase multiples remain relatively constant throughout 2023 – albeit against significantly lower deal flow.
— The few private market / LBO transactions that have closed have been at reduced multiples relative to what was observed in ’20
and ‘21.
• Venture remains challenged – there needs to be a key pathway to profitability or exit.
 Real Estate• A renewed focus on the efficient use of office space is leading to further footprint reductions and higher overall vacancy in the final
months of 2023.
• Over 1.4 billion SF, representing 16.6% of inventory, is now available on the leasing market, the most ever observed.
— Particularly notable is that the typical size of a new lease is also around 20% below its pre-pandemic average.
 Oil• Brent and WTI prices backed up considerably in November.
• On November 30, OPEC+ announced an additional round of ‘voluntary’ production cuts of 2.2mm bpd.
• There is skepticism over the latest OPEC+ decision on supply cuts and uncertainty surrounding global fuel demand heading into 2024.
 Gold• ~$2,050/ounce and ~$44,000/coin, respectively. Both have seen substantial gains in Q4.
24

Highlights – Valuation Implications
Q4 themes
 Valuation• Public observation: growth highly concentrated in large businesses with tech focus.
• Private market translation: while valuations have ‘held up’ mark-ups may be hard to come by.
 Rates• Public observation: higher for longer among the more coined terms in 2023.
• Private market translation #1: long duration assets such as growth equity and venture capital may continue to be challenged.
On the credit side, any fixed income instrument may also continue to see pressure.
• Private market translation #2: for those portfolio companies that have locked in low rates (fixed pay or via swap), there canbe meaningful benefits that should accrue to shareholders.
• Private market translation #3: in the LBO market, where deals are getting done, larger equity checks are getting cut.
— Keeping multiples in check.
 Credit• Majority of defaults are now occurring before the actual maturity date.
— High real yields that erode interest servicing capacity will be the greater driver of current default cycle.
— Reduced “optionality” relative to past downturns.
— Now a recovery measurement (vs yield in the past).
25

WACC Guidance

26

4. Valuation Hot Topics/Questions

Valuation Hot Topics
What Questions are LPs/Regulators/Auditors Asking or expected to Ask?

• How should we be thinking about debt in the context of leveraged buyouts?
• When equity kickers are included in private credit investments, why is the credit
component of the investment valued less than par?
• With the advent of more frequent and more timely valuations (daily or monthly) for
private investments in the 40-act space, what impact does this have on managers
reporting quarterly arrears?
• How worried should we be about Luxembourg, the SEC, or other global regulators?
• Other28

Thank You!

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31

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35

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ManilaFor more information, please contact:
David Larsen
Managing Director
Alternative Asset Advisory
Kroll, Seattle+1 415 693 5300
David.Larsen@kroll.com

Peter Salvatori
Managing Director
Portfolio Valuation
Kroll, Miami+1 973 775 8263
Peter.Salvatori@kroll.com

Jenetta Mason
Managing Director
Portfolio Valuation
Kroll, Chicago+1 312 697 4949
Jenetta.Mason@kroll.com

Lea Carty
Managing Director
Private Capital Markets
Kroll, New York
+1 212 833 3432
Lea.Carty@kroll.com

A b o u t Kro ll
As the leading independent provider of risk and financial advisory solutions, Kroll leverages our unique insights, data and technology to help clients stay ahead of complex demands. Kroll’s global team continues the firm’s nearly 100-year history oftrusted expertise spanning risk, governance, transactions and valuation. Our advanced solutions and intelligence provide clients the foresight they need to create an enduring competitive advantage. At Kroll, our values define who we are and how wepartner with clients and communities. Learn more at www.kroll.com.
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