ALTLOOK: Valuation Quarterly
Update—March 2024
March 7, 2024

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Today’s
Agenda

1. New Regulation
2. Macro-economic Update
3. 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
more than 39 years of transaction and accounting experience. He specializes in fair value accounting, specifically forvaluation, 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 andprivate 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
and Prague 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 andprivate 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 andsome 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 andhas 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 ofCertified 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 and technical advisor to the Private Equity Industry Guidelines Group and was instrumental in developing anddrafting 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 AICPA Net 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.

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. New Regulation

Regulatory Environment• International Valuation Standards• SEC Continuation Fund Rules• International Sustainability Standards Board

102. Macro-economic UpdatePrivate Credit Market: Benchmarks
Our market summary is derived from Kroll’s performing
private credit benchmarks. These are based on our
experience valuing these assets over the last more than 15
years.
• These benchmarks are drawn from over 3,000 obligors ofover 7,500 private credit instruments issued since 2004.
• The median EBITDA is $60MM, centering these data on
the middle market for direct lending.
• While we continue to build out the dataset supportingthese benchmarks, we are publishing a beta release andpreview on the Kroll Valuation Platform.
• If you don’t already have access to these benchmarks on
the valuation portal, please reach out to me at theaddress at the end of this presentation.

12

Private Credit Market: Trends in Valuations
Over the course of 2023, senior and secured loan yields &spreads tightened while valuations improved
Yields••

The fair value-weighted yield-to-maturity of the loans in our
first lien lending benchmark tightened by 56 bps to 11.18%.
This is down from the recent highs at the end of last year,
though yields remain elevated relative to recent history.

Spreads••

The fair value-weighted spread of these loans also tightenedby 52 bps to finish 2023 at 700.
This level is comparable to pre-covid levels

Valuations••

Valuations have continued their rebound from the trough theyexperienced following the start of the Fed’s campaign to raise
rates and the coinciding increase in credit concerns.
They ended 2023 at 98.437%, an increase of 58 bps from thestart of last year.

13

Private Credit Market: New Issue Yields
Focusing on originations, The fair value-weighted yield of
new issues also tightened though it showed greater intrayear variation
New Issue Yields• The fair value-weighted yield-to-maturity for newly issued
senior and secured loans (green line on the top chart) also
tightened by 71 bps over 2023.
• The median value (the green line on the chart at right),
however, shows less volatility.
• This suggests that the fair value weights – which emphasize
larger issues - may drive some of the volatility seen above.

14

Private Credit Market: Size Impact
To isolate the impact of size, we have partitioned the Sr
Lending benchmark into large (i.e., >$250m origination
amount) and small issues (<=$250m).
• The chart at right details the fair value-weighted yield-tomaturity for each of these sub-segments and it reveals apersistently lower yield for larger issues.
• This size effect shows up as well in loan margins – thecontractual margin floating rate loans pay above abenchmark rate - with larger issues paying lower margins.
• It also shows up in loan term-to-maturity, where smaller
issues have persistently shorter terms than do larger
issues.

15

Private Credit Market: Size Impact (cont’d)Size appears to be correlated with loan spread, margin, andterm• The chart at right portrays the median issuance size forlarge vs small issues coming to market and a reveals
significant upward trend for the large issues in recent
years• Separating benchmark constituents – both outstanding
issues and new issues by size, reveals that controlling forthis factor leads to a tighter correlation in yields.
• This exercise highlights the importance of understanding
the drivers of valuations.
• This is particularly important in benchmark construction.

16

Private Credit Market: Cohorts
Cohort Analysis• Median Leverage ratios for loans originated in 2020 are
Lower in subsequent years than were those for loans
originated in 2021.

• Median Interest Coverage ratios are higher for loans
originated during 2020 than were those for loans
originated in 2021.

• These results provide evidence that underwriting
standards vary with market conditions.

17Highlights - Economies
US• The consumer price index increased 0.3% in January, the Bureau of Labor Statistics reported. On a 12-month basis, that came out to 3.1%, down from 3.4% in
December.
— Excluding volatile food and energy prices, the so-called core CPI accelerated 0.4% in January and was up 3.9% from a year ago, unchanged from
December.
— Shelter prices accounted for much of the rise, climbing 0.6% on the month, contributing more than two-thirds of the headline increase. On a 12-month basis,
shelter rose 6%.
• Consensus is that the recent trend in inflation has enough for the Fed to begin a gradual cutting cycle beginning in June.
— Relative to Q4’23, cuts have been pushed out and reduced.
• Recent economic strength, as well as the improvement in inflation conditions, can be attributed to the rebound in the labor force.
— Supported by stronger participation rates and a rapid increase in net migration.
— The civilian labor force, at 167.8mn in 4Q 2023, is 677,000 above what the CBO (Congressional Budget Office) projected for the end-2023 labor force in their
January 2020 outlook.
China• China’s property market has seen little sign of recovery so far, despite continued policy relaxation since 4Q last year.
— New home sales, new starts, land transaction and property investment remain sluggish across the board.
— Home prices have continued to trend down after peaking in mid-2021
Europe• Inflation eased again in February, falling to 2.6% (from 2.8% in January) as high interest rates, moderating oil and gas prices, and sluggish growth held backprice increases in stores..
18

Public Equity Performance19

Credit Market Performance – US

20

Commodities

21

Highlights – Key Asset Classes
Private Capital Markets• Spreads on lower middle market loans are compressing, mirroring the trend for larger deals, but may not be falling as rapidly, market participantssay.
• LBO purchase multiples remain depressed.
— There is consensus that deal activity is expected to pick up significantly in 2024.
• Venture remains challenged – there needs to be a key pathway to profitability or exit.

Real Estate• Tenants gave back nearly 55 million SF in 2023, making it the fourth straight year of negative absorption and bringing the cumulative amount since2020 to -170 million SF.
— This is nearly four times the amount recorded during the Great Recession and three times as much as after the dot-com bust in 2001.
— It has helped push vacancy to a record 13.8%.

Oil• The IEA’s latest oil market report painted a balanced outlook for oil markets in 2024.
— Estimates for demand growth were trimmed only slightly to 1.28mm bpd (103mm bpd); but with non-OPEC supply raised by 200,000 bpd,
total supply growth ex OPEC is now seen at 1.5mm bpd, so that there is no room for OPEC to add back supplies.
— The ongoing Red Sea conflict is impacting supply side logistics as oil on water has increased adding downward pressure on useable onshore
barrels which stands at the lowest level since 2016, and which we suggest has some impact from a backward oil curve.

Gold• ~$2,100/ounce and ~$66,000/coin, respectively. Both have seen substantial gains in Q4'23 and Q1'24.

22

Highlights – Valuation Implications
Q1 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).
23

3. Valuation Hot Topics/Questions

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

• Is the Press correct? Is Debt overvalued?
• Observable transactions – how much weight should be given?
• What is the impact of FASB's prohibition to take into account contractual restrictions?
• Other25

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26

Thank You!

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29

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Our Evolution
In Operation for
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NEW FIRM,
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2005-2020•

Duff & Phelps founded as
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Duff & Phelps rebrands as
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30

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One Team, One Kroll

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31

We are proud to work with

51%

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32

Our Awards and Rankings
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Refinitiv Global M&A
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for Global Announced Fairness
Opinions for Full Year 20221
1Based on 51 Credited Deals per Refinitiv’s

Global Mergers & Acquisitions
Review Full Year 2022

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and Compliance Firm of theYear

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Winner - Turnaround Firmof the Year33

Our Awards and Rankings
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34

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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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