We want our clients to end with a full understanding after starting with partial or no knowledge.
We know that the whole area of valuations is something that most people do not discuss from day to day and therefore it can be very confusing. The confusion is growing because AI is giving people answers which can make it more opaque rather than clearer.
We have even had someone who took the report we sent, ran it through AI and then came back asking us to explain why we hadn’t done what AI said, even though the AI answer was puerile and out of context. (We explained that AI valuations are not defensible in court).
In fact, it would take longer to review an AI valuation report and verify it than if we just got on with our established very efficient approach to the work that needs to be done. So, the cost for the client would be higher rather than lower if something was led by AI. In the many meetings I am having with you all right now, everyone is saying that you are facing the same issue. I am sure it will calm down soon.
However, challenges around the impact of AI does not preclude the very serious issue that it matters that people can understand, dare I say believe, the contents of a valuation report. We think the least we can do is explain in words, as well as numbers, how and why we have drawn the conclusions we have.
As we have started using more sophisticated methodologies, this has become even more important to us. We are still getting there, but it is so satisfying when clients say, “I understand” and it’s even better when they and their advisers and even counterparties who are hostile all say, “I agree with your conclusions.”
As you know our reports are detailed, evidence led and full of footnotes referring back to the sources for the data we have used. The idea is that everything is in one place so no review or indeed if the report needs to be revisited, at a later date, everything is in one place and easy to find. If you have not seen one of our reports, let me know by emailing me on modwenna.rees-mogg@athlacapitalmanagement.com and I will send you a redacted copy of one of them.
Even our most sophisticated clients who understand what we are doing, often face the challenge of explaining what we are up to, to colleagues who may or may not have a similar level of understanding. So, it is also imperative that we make it easy for that person to explain what is going on.
When we first realised that making sure that people we have never and probably never will meet, will agree with our findings, we realised that laying out everything in quite short plain English sentences and paragraphs, avoiding using jargon where possible and not wandering around in great discussions of points that are not critical, matters.
We also realised the importance of getting the arguments not only right, but also putting them in the right order, so the logic is easy to follow for those who are not experts. Jargon does sometimes creep in. We try to make sure that where its use is unavoidable, we put a footnote to explain what we mean.
Sometimes it’s not the words, it’s the maths. Explaining how hurdles work is a favourite area where confusion can reign. We always start by explaining that if an ordinary share is the “normal” one or, as it were, the baseline, then the growth share with the hurdle is defined by how different it is to the ordinary share.
The more different (in terms of less rights etc), the lower the value. The hurdle is the icing on the cake as if properly designed it can drive the value of the growth shares lower because ITS GOING TO BE SUPER HARD TO EXCEED THE HURDLE AND MAKE ANY MONEY AT ALL. This can only happen because the hurdle rate is much higher than the current value of the company.
Whilst it will be possible at a stretch to exceed the hurdle, it won’t be easy without a lot of things going right and from working very hard indeed to grow the company’s value. Because getting this growth in value is going to be so hard, the probability of it happening is more remote and because it is more remote it makes it more of an outside bet it will be achieved. Because it is an outside bet, no normal person would pay much for the opportunity to get in.
That’s why the value of the growth share with the hurdle is therefore very low because the truth is that they really are not worth very much on the day they are bought. Even though one day they might give the shareholder a ton of money when sold to a third party.
Telling stories always eases understanding and the analysts are writing up short case studies of interesting valuations we have done (anonymised of course) that also explain how valuations work. We hope to start publishing them soon, but in the meantime, if you would like an anecdote filled hour on valuations, do call Harry Cruickshank who can set you up with our one-hour training course (or our 30 minute update) and I promise to ram it full of stories that will make valuations easy to understand!
We look forward to hearing from you!
