sample valuation of acme investment group

SAMPLE

Valuation of Acme Investment Group

June 2006

Strohbehn, Hall, Olson & Evans LLCA Private Investment Firm

245 96th Street, B9Brooklyn, NY 11209

This sample valuation for is from an actual analysis. Names, places and numbers associated with any client have been modified to preserve confidentiality. However, all public market data remains unchanged.

SAMPLE

Strohbehn, Hall, Olson & Evans LLC.

Introduction

A Valuation for Acme Investment Group The purpose of this analysis is to develop a fair valuation of Acme Investment Group, an investment management firm based outside the Unitd States. The valuation is to be related to current market values for other investment management firms and recent market transactions. To do this, acquisition transactions in the money management business have been reviewed, stock market data have been gathered, models have been developed, and Acme’s data have been applied to the models. Professional judgments have been made to adjust model results to reflect the specifics of Acme’s circumstances. Current market conditions indicate that market players are using earnings, including discounted-cash-flow analyses, as the most important consideration in determining valuations, overshadowing the impact of traditional ratio analysis. Based on analysis of these market conditions, our Composite Model is weighted in favor of the DCF Model:

50% for the Discounted Cash Flow Model (using market-driven discount rates)

38% for the Volume Model (valuation as a function of sales, future earnings, and book value)

12% for the Composite Ratio Model (Price-to-AUMs, Price-to-Sales, Price-to-Earnings, Price-to-Book) We recommend that Acme be valued at USD 429.2 million with a range surrounding this midpoint of ±15%.

SAMPLE


Introduction

• Market Overview 3

• Analytical Overview 9

• Valuation – Ratio Models 13– Price-to-AUM Ratio

– Price-to-Sales Ratio

– Price-to-Earnings Ratio

– Price-to-Book Ratio

– Composite Ratio Model

• Valuation – Volume Model 28

• Valuation – Discounted Cash Flow Model 31

• Composite Valuation using Volume, Ratio and DCF Models 36

• Adjustments to Composite Valuation 40

• Recommended Valuation for Acme 43

SAMPLE


Market Overview

• There were 117 mergers or acquisitions of investment management firms in 2005. For the largest transactions reported by Pensions and Investments – reflecting an aggregate transaction value of USD 13 billion -- prices ranged from 0.54% to 9.13% of AUMs.

• The Reuters data base contains 103 companies in its “Investment Services” industry. MSCI lists 26 firms as “Asset Management and Custody Banks” in developed countries and one such firm in emerging markets.

• From this overlapping universe, there are 17 “pure” investment management firms with public shares actively traded on a secondary market for which satisfactory information was available. Firms were eliminated from the original universe for several reasons:

– Firms that do significant business in others areas, such as brokerage, investment banking, or banking. Examples include Banca Fideuram, Julius Baer, Man Group, and Schroders.

– Firms for which insufficient data was available. Examples include the Chilean manager Provida and DHIL.

– Firms whose business was private equity or venture capital.

SAMPLE


Market Overview

The following pages include data for the 17 firms to be analyzed:

• Employees range from 70 to as many as 48,000.

• Assets under management (AUMs) range from USD 20 billion to as high as USD 864 million.

• Market capitalizations range from USD 700 million to USD 23 billion.

– Price-to-AUM ratios range from 0.93% to 4.52%.

– Price-to-Sales ratios range from 1.40 to 6.02.

– Price-to-Earnings ratios range from 14 to 36.

– Price-to-Book ratios range from 1.48 to 15.

• The average reported beta is 1.31, but is as low as 0.09 and as high as 2.68.

SAMPLE


Market Overview

Source: Reuters, Hoover’s, corporate web sites.

Mkt Net Book

Ticker Name Country Emp AUMs Price Cap Shares Beta Sales Inc. Value

AMG Affiliated Managers Group, Inc. United States 70 184,300 90.07 2,821 31 1.81 1,112 129 817

AB AllianceBernstein Holding LP United States 4,312 578,552 63.96 5,381 84 1.13 3,596 267 1,457

AMP Ameriprise Financial, Inc. United States 11,900 446,000 44.53 10,882 244 1.31 7,796 528 7,341

AVZ AMVESCAP PLC (ADR) UK 5,586 419,000 19.21 7,861 409 2.68 3,132 246 3,621

BLK BlackRock, Inc. United States 2,151 463,000 132.88 8,522 64 0.09 1,583 258 989

CLMS Calamos Asset Management, Inc United States 331 43,804 30.78 713 23 1.31 483 32 195

CNS Cohen & Steers, Inc. United States 117 20,491 24.48 891 36 1.31 151 34 171

EV Eaton Vance Corp. United States 757 88,569 26.39 3,376 128 1.12 846 164 489

BEN Franklin Resources, Inc. United States 7,500 504,000 87.70 22,799 260 1.14 5,019 1,111 6,543

GBL Gamco Investor Inc. United States 200 26,798 35.06 1,009 29 1.02 251 70 411

JNS Janus Capital Group Inc. United States 1,034 148,506 17.69 3,744 212 2.12 1,024 104 2,519

LM Legg Mason, Inc. United States 5,580 864,399 95.23 11,794 124 1.50 4,209 434 5,640

JNC Nuveen Investments, Inc. United States 743 145,000 44.06 3,489 79 0.80 641 173 225

TROW T. Rowe Price Group, Inc. United States 4,372 269,493 78.02 10,360 133 1.60 1,721 453 2,171

WDR Waddell & Reed Financial, Inc. United States 1,573 44,852 21.92 1,858 85 1.40 692 62 265

FII Federated Investors, Inc. United States 1305 230,000 32.12 3,432 107 0.67 955 201 557HGI (A) Henderson Global Investors UK 900 67,860 1.39 2,274 1,641 1.31 523 86 1,165

Total 48,431 4,544,624 101,207 33,735 4,350 34,576Maximum 11,900 864,399 22,799 2.68 7,796 1,111 7,341Average 2,849 267,331 5,953 1.31 1,984 256 2,034Minimum 70 20,491 713 0.09 151 32 171

Valuation Benchmarks for Asset Management Companies

SAMPLE


Market Overview


Profit

Ticker Name P/AUM P/E P/S P/B Sales Book Profit Margin ROE LTG (e) 3Y Sls 3Y EPS

AMG Affiliated Managers Group, Inc. 1.53% 21.91 2.54 3.45 0.603% 0.443% 0.070% 11.6% 15.8% 13.1% 23.8% 22.8%

AB AllianceBernstein Holding LP 0.93% 20.17 1.50 3.69 0.622% 0.252% 0.046% 7.4% 18.3% 12.9% 5.8% 12.8%

AMP Ameriprise Financial, Inc. 2.44% 20.61 1.40 1.48 1.748% 1.646% 0.118% 6.8% 7.2% 10.3% 8.9% -5.4%

AVZ AMVESCAP PLC (ADR) 1.88% 31.97 2.51 2.17 0.747% 0.864% 0.059% 7.9% 6.8% 12.2% 6.6% -10.4%

BLK BlackRock, Inc. 1.84% 33.00 5.38 8.62 0.342% 0.214% 0.056% 16.3% 26.1% 14.0% 27.3% 19.7%

CLMS Calamos Asset Management, Inc 1.63% 22.38 1.48 3.66 1.103% 0.445% 0.073% 6.6% 16.4% 13.6% 68.1% 5.4%

CNS Cohen & Steers, Inc. 4.35% 26.54 5.89 5.21 0.739% 0.835% 0.164% 22.2% 19.6% 13.3% 38.3% 35.4%

EV Eaton Vance Corp. 3.81% 20.65 3.99 6.90 0.955% 0.552% 0.185% 19.3% 33.4% 14.0% 12.9% 10.2%

BEN Franklin Resources, Inc. 4.52% 20.52 4.54 3.48 0.996% 1.298% 0.220% 22.1% 17.0% 13.8% 19.6% 35.0%

GBL Gamco Investor Inc. 3.76% 14.41 4.01 2.45 0.938% 1.534% 0.261% 27.8% 17.0% 8.0% 6.3% 6.0%

JNS Janus Capital Group Inc. 2.52% 36.17 3.65 1.49 0.690% 1.696% 0.070% 10.1% 4.1% 17.3% -5.3% 0.5%

LM Legg Mason, Inc. 1.36% 27.19 2.80 2.09 0.487% 0.652% 0.050% 10.3% 7.7% 14.8% 18.6% 19.4%

JNC Nuveen Investments, Inc. 2.41% 20.19 5.45 15.52 0.442% 0.155% 0.119% 27.0% 76.9% 12.5% 14.1% 17.9%

TROW T. Rowe Price Group, Inc. 3.84% 22.85 6.02 4.77 0.639% 0.806% 0.168% 26.3% 20.9% 11.9% 17.9% 27.5%

WDR Waddell & Reed Financial, Inc. 4.14% 30.14 2.68 7.01 1.543% 0.591% 0.137% 8.9% 23.3% 12.5% 12.7% -11.8%

FII Federated Investors, Inc. 1.49% 17.04 3.59 6.16 0.415% 0.242% 0.088% 21.1% 36.1% 11.3% 5.3% -3.8%HGI (A) Henderson Global Investors 3.35% 26.49 4.35 1.95 0.771% 1.716% 0.127% 16.4% 7.4% 20.0% 20.0% 23.1%

Maximum 4.52% 36.17 6.02 15.52 1.748% 1.716% 0.261% 27.8% 76.9% 20.0% 68.1% 35.4%

Average 2.23% 23.27 3.00 2.93 0.742% 0.761% 0.096% 12.9% 12.6% 12.8% 13.8% 10.8%Minimum 0.93% 14.41 1.40 1.48 0.342% 0.155% 0.046% 6.6% 4.1% 8.0% -5.3% -11.8%

As % of AUMs Growth Rates

Valuation Benchmarks for Asset Management Companies (cont'd)

Valuation Ratios

SAMPLE


Market OverviewMarket Cap vs. Revenue

y = 2.4966x

R2 = 0.4928

0

5,000

10,000

15,000

20,000

25,000

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

Revenue

Mar

ket

Cap

ital

izat

ion

Market Value vs. Book Value

y = 2.4115x

R2 = 0.6237

0

5,000

10,000

15,000

20,000

25,000

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

Book Value

Mar

ket

Cap

ital

izat

ion

Market Value vs Earnings

y = 22.018x

R2 = 0.9479

0

5,000

10,000

15,000

20,000

25,000

0 200 400 600 800 1,000 1,200

After-Tax Income

Mar

ket

Cap

ital

izat

ion

Market Value vs AUMs

y = 0.0199x

R2 = 0.4794

0

5,000

10,000

15,000

20,000

25,000

0 200,000 400,000 600,000 800,000 1,000,000

Assets Under Management

Mar

ket

Cap

ital

izat

ion


These four graphs plot market capitalization for 17 firms against four different volumes: AUMs, revenue, earnings, and book value.

As can be seen, earnings appears to have the greatest ability to predict market value. Earnings explains nearly 95% of the variability among firms, while the other three variables only explain 45-64% of the variability.

SAMPLE


Market Overview

Seller AUMs Stake Buyer Price 100% Px/AUMs

Guggenheim Alternative Asset Management $2,800 72% Bank of Ireland $184 $256 9.13%

Clarington Corp. $3,800 100% Industrial Alliance $245 $245 6.45%

Alcentra Group $6,200 80% Bank of New York $300 $375 6.05%

Permal Group $19,300 80% Legg Mason $800 $1,000 5.18%

GAM & SBC Wealth Management $96,700 100% Julius Baer $4,553 $4,553 4.71%

Israeli Mutual and Provident Funds $17,200 100% Financial Buyers & Israeli Insurers $773 $773 4.49%

Framlington Group $7,900 100% Axa Group $339 $339 4.29%

Daehan Investment & Securities $21,300 100% Hana Bank $474 $474 2.23%

Nextra Investment Management $125,700 63% Credit Agricole $1,060 $1,683 1.34%

First Asset Management $23,000 100% Affiliated Managers Group $250 $250 1.09%

Citigroup Asset Management $437,000 100% Legg Mason $3,700 $3,700 0.85%

Deutsche Asset Management (U.K. & Phil) $81,300 100% Aberdeen Asset Mgmt. $442 $442 0.54%

T O T A L $842,200 $13,120 $14,089 1.67%

Source: Pensions and Investments

2005 Major Transactions

According to Pensions and Investments, there were 117 mergers or acquisitions in the global investment management community in 2005. These 12 were listed as the most important. Though commentators often focus on the price paid for assets under management, the range of values – from 0.54% to 9.13% -- is stunning and indicates that Price-to-AUM ratios are insufficient in themselves for pricing a transaction.

SAMPLE


Analytical Overview

ProfessionalJudgment

Discounted Cash Flow

ValuationVolume Models

Ratio Models

Valuation models are far too sensitive to rely on a single approach. Even a minute change in a discount rate or a modification of growth assumptions, for example, can yield significant changes. Consequently, it is wise to use several complementary methods, so that each is a check on the other.

In this analysis, three quantitative models are included: (1) ratios models such as price-to-AUMs or price-to-earnings; (2) volume models, where market capitalizations are correlated against variables such as sales and AUMs; and (3) traditional discounted-cash-flow analysis, which often both the most reliable for a specific firm and the most sensitive – or volatile – to input changes.

Finally, judgment is inevitably necessary to adjust model outputs for firm-specific situations, such as geography, lack of liquidity, or the relative size of the transaction.

SAMPLE


Analytical Overview

Broadly, there are four steps to complete the analysis.

First, four different ratio sub-models are developed: (i) price-to-AUMs, (ii) price-to-sales, (iii) price-to-earnings, and (iv) price-to-book. After the sub-models are developed, Acme’s information is applied.

Second, three different models are developed, each based on a different approach One uses strictly volume data, such as AUMs and sales. The second applied discounted cash flow analysis, and the third creates a composite ratio model from the component sub-models in the first step. When complete, Acme’s information is applied to each model.

Third, the three models are combined into a composite model, and Acme’s results are also calculated, yielding a quantitative valuation.

Finally, professional judgment is applied to Acme’s case, to consider such specific situations as difference in liquidity, the idiosyncrasies of the Belgian market, and the effect of having a single buyer of a significant block of stock.

Recommended Valuation

Adjustments for Buyer, Liquidity, and Geography

Composite Model Valuation

Volume Model Composite Ratio Model DCF Model

Price to AUMs

Price to Sales

Price to Earnings

Price to Book

Recommended Valuation

Adjustments for Buyer, Liquidity, and Geography

Composite Model Valuation

Volume Model Composite Ratio Model DCF Model

Price to AUMs

Price to Sales

Price to Earnings

Price to Book

SAMPLE


Analytical Overview

Heritage

Book ValueAssets Under ManagementBook Value as % of AUMs Skill

RevenueProfit

Sales as % of AUMsProfit Margin

Return on Equity (ROE) Potential

EPS Growth EstimatesRevenue Growth Estimates

When building a statistical model, it is important to have a logical framework and not simply rely on the statistical techniques themselves, for models must make sense. For these valuations models, we will seek to include – unless the data do not support it – at least one variable from each of three categories: (1) heritage, (2) skill, and (3) potential. These variables tend to reflect different qualities of a firm. As “orthogonal” qualities, it is useful to evaluate each dimension.

P

S

H

SAMPLE


Analytical Overview

For the market-driven analysis, each model requires four steps:

• Identify independent variables:– Market capitalization– Price-to-AUM Ratio– Price-to-Sales Ratio– Price-to-Earnings Ratio– Price-to-Book Ratio

• For each independent variable, identify possible dependent variables, including:

– AUMs– Book Value– Profit Margin– Future Earnings

• To choose optimal coefficients for various models (or weights for composite models), use Custom Model Optimization With Constraints (CMOC). See Notes for an explanation of this methodology and why we use it instead of standard linear regression techniques.

• The methodology for the Discounted-Cash-Flow Model is separate.

• Apply Acme’s data to each model.

SAMPLE


Valuation – Ratio ModelsPrice-to-AUM Ratio Sub-Model

The Price-to-AUM sub-model is part of the set of Ratio Models. The constrained model optimization selected five independent variables, including at least one each from the three dimensions of Heritage, Skill and Potential.

The model explains 55% of the variability among the firms in the data set, good but not a strong showing. For only 5 of the 17 firms was the forecast within ±10%. Though on average, the model was calibrated to hit its target, the mean absolute error was 19%. Its largest error was for Waddell & Reed, where it understated that firm’s ratio by 57%.

Model for Value as % of AUMs

y = 0.9998x + 0.002

R2 = 0.5473

0%

1%

2%

3%

4%

5%

0% 1% 2% 3% 4% 5%

Forecast

Act

ual

Price-to-AUM Ratio = 0.661 * Sales as % of AUMs +

0.787 * Book Value as % of AUMs +

0.005 Earnings as % of AUMs +

0.072 * Profit Margin (after-tax) +

0.014 * 3-Yr Historical EPS Growth

SAMPLE



Px as % ABS

Name of AUMs Sls/AUM BV/AUM E/AUM Margin ROE LTG (e) 3Y Sls % 3Y EPS % FCST % Diff Value

Affiliated Managers Group, Inc. 1.53% 0.603% 0.443% 0.070% 11.6% 15.8% 13.1% 23.8% 22.8% 1.7% 14.1% 14.1%

AllianceBernstein Holding LP 0.93% 0.622% 0.252% 0.046% 7.4% 18.3% 12.9% 5.8% 12.8% 1.1% 17.8% 17.8%

Ameriprise Financial, Inc. 2.44% 1.748% 1.646% 0.118% 6.8% 7.2% 10.3% 8.9% -5.4% 2.9% 18.3% 18.3%

AMVESCAP PLC (ADR) 1.88% 0.747% 0.864% 0.059% 7.9% 6.8% 12.2% 6.6% -10.4% 1.8% -4.6% 4.6%

BlackRock, Inc. 1.84% 0.342% 0.214% 0.056% 16.3% 26.1% 14.0% 27.3% 19.7% 1.8% -2.7% 2.7%

Calamos Asset Management, Inc 1.63% 1.103% 0.445% 0.073% 6.6% 16.4% 13.6% 68.1% 5.4% 1.6% 0.0% 0.0%

Cohen & Steers, Inc. 4.35% 0.739% 0.835% 0.164% 22.2% 19.6% 13.3% 38.3% 35.4% 3.2% -27.3% 27.3%

Eaton Vance Corp. 3.81% 0.955% 0.552% 0.185% 19.3% 33.4% 14.0% 12.9% 10.2% 2.5% -35.0% 35.0%

Franklin Resources, Inc. 4.52% 0.996% 1.298% 0.220% 22.1% 17.0% 13.8% 19.6% 35.0% 3.7% -18.8% 18.8%

Gamco Investor Inc. 3.76% 0.938% 1.534% 0.261% 27.8% 17.0% 8.0% 6.3% 6.0% 4.2% 12.0% 12.0%

Janus Capital Group Inc. 2.52% 0.690% 1.696% 0.070% 10.1% 4.1% 17.3% -5.3% 0.5% 2.9% 14.5% 14.5%

Legg Mason, Inc. 1.36% 0.487% 0.652% 0.050% 10.3% 7.7% 14.8% 18.6% 19.4% 1.8% 33.6% 33.6%

Nuveen Investments, Inc. 2.41% 0.442% 0.155% 0.119% 27.0% 76.9% 12.5% 14.1% 17.9% 2.5% 4.6% 4.6%

T. Rowe Price Group, Inc. 3.84% 0.639% 0.806% 0.168% 26.3% 20.9% 11.9% 17.9% 27.5% 3.3% -13.9% 13.9%

Waddell & Reed Financial, Inc. 4.14% 1.543% 0.591% 0.137% 8.9% 23.3% 12.5% 12.7% -11.8% 1.8% -56.9% 56.9%

Federated Investors, Inc. 1.49% 0.415% 0.242% 0.088% 21.1% 36.1% 11.3% 5.3% -3.8% 2.0% 36.7% 36.7%Henderson Global Investors 3.35% 0.771% 1.716% 0.127% 16.4% 7.4% 20.0% 20.0% 23.1% 3.6% 7.7% 7.7%

Average 0.0% 18.7%

Correlation with Market Actual 1.00 0.39 0.44 0.86 0.54 0.02 -0.01 -0.01 0.29 0.74

Correlation with Forecast 0.74 0.17 0.74 0.82 0.65 -0.08 -0.02 -0.15 0.34 1.00

Parameters 0.258 1.146 0.000 0.078 0.000 0.000 0.004 0.003

Forecasting Price-to-AUM Ratio

Independent Variables


SAMPLE



Application of Sub-Model to Acme Investment Group

The application of Acme’s data to this sub-model yields one estimate of Acme’s market value. This result will be included in the Composite Ratio Model that follows.

Parameter * Acme = Value

0.661 1.50% 0.99% Sales as % of AUMs +

0.787 2.86% 2.25% Book Value as % of AUMs +

0.005 1.50% 0.01% Earnings as % of AUMs +

0.072 24.85% 1.78% Profit Margin (after-tax) +

0.014 20.87% 0.29% 3-Yr Historical EPS Growth

5.31% Price-to-AUM Ratio

x 3,500 AUMs (mm)

185.9 Price-to-AUM Sub-Model

Price-to-AUM Ratio

=

SAMPLE


Valuation – Ratio ModelsPrice-to-Sales Ratio Sub-Model

The Price-to-Sales sub-model is part of the set of Ratio Models. The constrained model optimization selected four independent variables, including at least one each from the three dimensions of Heritage, Skill and Potential.

The model explains 68% of the variability among the firms in the data set. For 7 of the 17 firms was the forecast within ±10%. Though on average, the model was calibrated to hit its target, the mean absolute error was 18%. Its largest error was for Gamco, where it overstated that firm’s ratio by 55%.

Model for Price-to-Sales Ratio

y = 0.8213x + 0.7359

R2 = 0.6823

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00

ForecastA

ctu

al

Price-to-Sales Ratio = 44.81 * Book Value as % of AUMs +


0.27 Long-Term Growth Rate +


SAMPLE



P/S ABS

Name Ratio Sls/AUM BV/AUM E/AUM Margin ROE LTG (e) 3Y Sls % 3Y EPS % FCST % Diff Value

Affiliated Managers Group, Inc. 2.54 0.603% 0.443% 0.070% 11.6% 15.8% 13.1% 23.8% 22.8% 2.54 0.0% 0.0%

AllianceBernstein Holding LP 1.50 0.622% 0.252% 0.046% 7.4% 18.3% 12.9% 5.8% 12.8% 1.62 8.4% 8.4%

Ameriprise Financial, Inc. 1.40 1.748% 1.646% 0.118% 6.8% 7.2% 10.3% 8.9% -5.4% 2.10 50.6% 50.6%

AMVESCAP PLC (ADR) 2.51 0.747% 0.864% 0.059% 7.9% 6.8% 12.2% 6.6% -10.4% 1.97 -21.6% 21.6%

BlackRock, Inc. 5.38 0.342% 0.214% 0.056% 16.3% 26.1% 14.0% 27.3% 19.7% 3.37 -37.4% 37.4%

Calamos Asset Management, Inc 1.48 1.103% 0.445% 0.073% 6.6% 16.4% 13.6% 68.1% 5.4% 1.54 4.6% 4.6%

Cohen & Steers, Inc. 5.89 0.739% 0.835% 0.164% 22.2% 19.6% 13.3% 38.3% 35.4% 4.81 -18.2% 18.2%

Eaton Vance Corp. 3.99 0.955% 0.552% 0.185% 19.3% 33.4% 14.0% 12.9% 10.2% 4.11 3.0% 3.0%

Franklin Resources, Inc. 4.54 0.996% 1.298% 0.220% 22.1% 17.0% 13.8% 19.6% 35.0% 5.01 10.4% 10.4%

Gamco Investor Inc. 4.01 0.938% 1.534% 0.261% 27.8% 17.0% 8.0% 6.3% 6.0% 6.22 54.9% 54.9%

Janus Capital Group Inc. 3.65 0.690% 1.696% 0.070% 10.1% 4.1% 17.3% -5.3% 0.5% 2.81 -23.2% 23.2%

Legg Mason, Inc. 2.80 0.487% 0.652% 0.050% 10.3% 7.7% 14.8% 18.6% 19.4% 2.38 -15.0% 15.0%

Nuveen Investments, Inc. 5.45 0.442% 0.155% 0.119% 27.0% 76.9% 12.5% 14.1% 17.9% 5.45 0.0% 0.0%

T. Rowe Price Group, Inc. 6.02 0.639% 0.806% 0.168% 26.3% 20.9% 11.9% 17.9% 27.5% 5.62 -6.7% 6.7%

Waddell & Reed Financial, Inc. 2.68 1.543% 0.591% 0.137% 8.9% 23.3% 12.5% 12.7% -11.8% 2.05 -23.5% 23.5%

Federated Investors, Inc. 3.59 0.415% 0.242% 0.088% 21.1% 36.1% 11.3% 5.3% -3.8% 4.31 19.8% 19.8%Henderson Global Investors 4.35 0.771% 1.716% 0.127% 16.4% 7.4% 20.0% 20.0% 23.1% 4.08 -6.1% 6.1%

Average 0.0% 17.9%

Correlation with Market Actual 1.00 -0.46 -0.01 0.45 0.84 0.42 0.12 0.00 0.61 0.83

Correlation with Forecast 0.83 -0.28 0.16 0.76 0.99 0.44 -0.20 -0.13 0.49 1.00

Parameters 0.000 44.811 0.000 19.768 0.000 0.275 0.000 0.056

Forecasting Price-to-Sales Ratio



SAMPLE






44.81 2.86% 1.28 Book Value as % of AUMs +

19.77 24.85% 4.91 Profit Margin (after-tax) +

0.27 20.00% 0.05 Long-Term Growth Rate +

0.06 20.87% 0.01 3-Yr Historical EPS Growth

6.26 Price-to-Sales Ratio

x 52.50 Sales (mm)

328.6 Price-to-Sales Sub-Model

Price-to-Sales Ratio

=

SAMPLE


Valuation – Ratio ModelsPrice-to-Earnings Ratio Sub-Model

The Price-to-Earnings sub-model is part of the set of Ratio Models. The constrained model optimization selected three independent variables, including at least one each from the three dimensions of Heritage, Skill and Potential.

The model explains only 30% of the variability among the firms in the data set. For 7 of the 17 firms was the forecast within ±10%. Though on average, the model was calibrated to hit its target, the mean absolute error was 15%. Its largest error was for Henderson Global Investors, where it overstated that firm’s ratio by 35%.

Price-to-Earnings Ratio = 80.8 * Sales as % of AUMs +

134.0 * Book Value as % of AUMs +

164.4 * Long-Term Growth Rate

Model for Price-Earnings Ratio

y = 0.7271x + 7.1252

R2 = 0.3019

10

15

20

25

30

35

40

10 15 20 25 30 35 40

Forecast

Act

ual

SAMPLE



P/E ABS





AMVESCAP PLC (ADR) 31.97 0.747% 0.864% 0.059% 7.9% 6.8% 12.2% 6.6% -10.4% 21.77 -31.9% 31.9%

BlackRock, Inc. 33.00 0.342% 0.214% 0.056% 16.3% 26.1% 14.0% 27.3% 19.7% 23.58 -28.5% 28.5%


Cohen & Steers, Inc. 26.54 0.739% 0.835% 0.164% 22.2% 19.6% 13.3% 38.3% 35.4% 23.51 -11.4% 11.4%

Eaton Vance Corp. 20.65 0.955% 0.552% 0.185% 19.3% 33.4% 14.0% 12.9% 10.2% 24.47 18.5% 18.5%




Legg Mason, Inc. 27.19 0.487% 0.652% 0.050% 10.3% 7.7% 14.8% 18.6% 19.4% 25.62 -5.8% 5.8%

Nuveen Investments, Inc. 20.19 0.442% 0.155% 0.119% 27.0% 76.9% 12.5% 14.1% 17.9% 21.11 4.6% 4.6%



Federated Investors, Inc. 17.04 0.415% 0.242% 0.088% 21.1% 36.1% 11.3% 5.3% -3.8% 19.18 12.5% 12.5%Henderson Global Investors 26.49 0.771% 1.716% 0.127% 16.4% 7.4% 20.0% 20.0% 23.1% 35.81 35.2% 35.2%

Average 0.0% 14.6%

Correlation with Market Actual 1.00 -0.10 0.11 -0.48 -0.45 -0.35 0.56 -0.03 -0.13 0.55

Correlation with Forecast 0.55 -0.09 0.39 -0.22 -0.26 -0.34 0.98 0.07 0.25 1.00

Parameters 80.823 133.995 0.000 0.000 0.000 164.431 0.000 0.000

Forecasting Price-to-Earnings Ratio



SAMPLE






80.8 1.50% 1.21 Sales as % of AUMs +


164.4 20.00% 32.89 Long-Term Growth Rate

37.93 Price-to-Earnings Ratio

x 13.01 Earnings (mm)

493.6 Price-to-Earnings Sub-Model

Price-to-Earnings

Ratio=

SAMPLE


Valuation – Ratio ModelsPrice-to-Book Ratio Sub-Model

Model for Price-to-Book Ratio

y = 1.1367x - 0.2853

R2 = 0.9019

0

2

4

6

8

10

12

14

16

18

0 2 4 6 8 10 12 14 16

Forecast

Act

ual

The Price-to-Book sub-model is part of the set of Ratio Models. The constrained model optimization selected three independent variables, including at least one each from the three dimensions of Heritage, Skill and Potential.

The model explains over 90% of the variability among the firms in the data set. For 10 of the 17 firms was the forecast within ±10%. Though on average, the model was calibrated to hit its target, the mean absolute error was 16%. Its largest error was for Gamco, where it overstated that firm’s ratio by 49%.

Price-to-Book Ratio = 4.17 * Book Value as % of AUMs +


16.72 * Return on Equity (ROE) +

2.89 * Long-Term Growth Rate +

0.49 * 3-Yr Historical Sales Growth +


SAMPLE



P/B ABS





AMVESCAP PLC (ADR) 2.17 0.747% 0.864% 0.059% 7.9% 6.8% 12.2% 6.6% -10.4% 1.49 -31.3% 31.3%

BlackRock, Inc. 8.62 0.342% 0.214% 0.056% 16.3% 26.1% 14.0% 27.3% 19.7% 5.46 -36.7% 36.7%


Cohen & Steers, Inc. 5.21 0.739% 0.835% 0.164% 22.2% 19.6% 13.3% 38.3% 35.4% 4.77 -8.4% 8.4%

Eaton Vance Corp. 6.90 0.955% 0.552% 0.185% 19.3% 33.4% 14.0% 12.9% 10.2% 6.51 -5.7% 5.7%




Legg Mason, Inc. 2.09 0.487% 0.652% 0.050% 10.3% 7.7% 14.8% 18.6% 19.4% 2.29 9.5% 9.5%

Nuveen Investments, Inc. 15.52 0.442% 0.155% 0.119% 27.0% 76.9% 12.5% 14.1% 17.9% 13.95 -10.1% 10.1%



Federated Investors, Inc. 6.16 0.415% 0.242% 0.088% 21.1% 36.1% 11.3% 5.3% -3.8% 6.63 7.6% 7.6%Henderson Global Investors 1.95 0.771% 1.716% 0.127% 16.4% 7.4% 20.0% 20.0% 23.1% 2.58 32.2% 32.2%

Average 0.0% 16.3%

Correlation with Market Actual 1.00 -0.30 -0.64 0.04 0.46 0.95 -0.14 0.07 0.12 0.95

Correlation with Forecast 0.95 -0.34 -0.57 0.16 0.60 0.99 -0.18 0.05 0.22 1.00

Parameters 0.000 4.165 0.000 1.362 16.725 2.887 0.492 1.635


Forecasting Price-to-Book Ratio


SAMPLE







1.36 24.85% 0.34 Profit Margin (after-tax) +

16.72 20.00% 3.34 Return on Equity (ROE) +

2.89 20.00% 0.58 Long-Term Growth Rate +

0.49 25.00% 0.12 3-Yr Historical Sales Growth +

1.64 20.87% 0.34 3-Yr Historical EPS Growth

4.84 Price-to-Book Ratio

x 100.00 Book Value (mm)

484.4 Price-to-Book Sub-Model

Price-to-Book Ratio

=

SAMPLE


Valuation – Ratio ModelsComposite Ratio Model

Composite Ratio Model = 30.0% * Price-to-AUM Model +

10.0% * Price-to-Sales Model +

50.0% * Price-to-Earnings Model +

10.0% * Price-to-Book Model

Composite of Ratio Models

y = 0.9193x + 438.99

R2 = 0.9767

0

5,000

10,000

15,000

20,000

25,000

0 5,000 10,000 15,000 20,000 25,000 30,000

ForecastM

arke

t C

apit

aliz

atio

n

The Composite Ratio Model comprises the four individual sub-models for Price-to-AUMs, Price-to-Sales, Price-to-Earnings, and Price-to-Book. Given the jump in variability explanation, the Composite is far superior to the individual models.

If the model optimizer had been unconstrained, the Composite would have included only the two sub-models for sales and earnings. However, it was a judgment call to require the Composite to include no less than a 10% weighting for each sub-model.

The model explains 97% of the variability among the firms in the data set. For 8 out of 17 firms, the forecast is within ±10%, and the model’s mean absolute error is 13%. Its largest error is for Waddell & Reed, where it understates that firm’s value by almost 36%.

SAMPLE




NOTE: For each investment firm, the blue-shaded box highlights which of the four sub-models came closest to forecasting market capitalization. As can be seen, each of the four models had a fair number of successes. The Price-to-Earnings Model had the lowest mean absolute error at 14.6%, while the other models ranged from 16-19%, which justifies its 50% weighting in the Composite Ratio Model. If there is a lesson, earnings is more important than AUMs, sales, or book value in determining market valuations.

Market Comp

Name Cap AUMs Sales Earn Bk Val AUMs Sales Earn Bk Val AUMs Sales Earn Bk Val Model Diff ABS

Affiliated Managers Group, Inc. 2,821 184,300 1,112 129 817 1.75% 2.54 22.60 3.68 3,219 2,820 2,910 3,006 3,003 6.5% 6.5%

AllianceBernstein Holding LP 5,381 578,552 3,596 267 1,457 1.10% 1.62 22.05 3.78 6,337 5,833 5,883 5,514 5,977 11.1% 11.1%

Ameriprise Financial, Inc. 10,882 446,000 7,796 528 7,341 2.89% 2.10 20.61 1.62 12,874 16,386 10,882 11,877 12,130 11.5% 11.5%

AMVESCAP PLC (ADR) 7,861 419,000 3,132 246 3,621 1.79% 1.97 21.77 1.49 7,500 6,160 5,353 5,403 6,083 -22.6% 22.6%

BlackRock, Inc. 8,522 463,000 1,583 258 989 1.79% 3.37 23.58 5.46 8,292 5,335 6,090 5,399 6,606 -22.5% 22.5%

Calamos Asset Management, Inc 713 43,804 483 32 195 1.63% 1.54 23.85 3.66 713 745 760 713 740 3.7% 3.7%

Cohen & Steers, Inc. 891 20,491 151 34 171 3.16% 4.81 23.51 4.77 648 729 789 816 744 -16.6% 16.6%

Eaton Vance Corp. 3,376 88,569 846 164 489 2.48% 4.11 24.47 6.51 2,194 3,479 4,000 3,184 3,325 -1.5% 1.5%

Franklin Resources, Inc. 22,799 504,000 5,019 1,111 6,543 3.67% 5.01 25.28 4.26 18,507 25,169 28,083 27,892 24,900 9.2% 9.2%

Gamco Investor Inc. 1,009 26,798 251 70 411 4.22% 6.22 15.95 3.65 1,130 1,563 1,116 1,500 1,203 19.3% 19.3%

Janus Capital Group Inc. 3,744 148,506 1,024 104 2,519 2.89% 2.81 31.26 1.38 4,288 2,874 3,236 3,468 3,539 -5.5% 5.5%

Legg Mason, Inc. 11,794 864,399 4,209 434 5,640 1.82% 2.38 25.62 2.29 15,759 10,021 11,109 12,917 12,576 6.6% 6.6%

Nuveen Investments, Inc. 3,489 145,000 641 173 225 2.52% 5.45 21.11 13.95 3,649 3,489 3,649 3,137 3,582 2.6% 2.6%

T. Rowe Price Group, Inc. 10,360 269,493 1,721 453 2,171 3.31% 5.62 21.15 4.77 8,923 9,666 9,586 10,347 9,472 -8.6% 8.6%

Waddell & Reed Financial, Inc. 1,858 44,852 692 62 265 1.79% 2.05 22.58 4.27 801 1,421 1,392 1,131 1,191 -35.9% 35.9%

Federated Investors, Inc. 3,432 230,000 955 201 557 2.04% 4.31 19.18 6.63 4,690 4,112 3,861 3,694 4,118 20.0% 20.0%Henderson Global Investors 2,274 67,860 523 86 1,165 3.61% 4.08 35.81 2.58 2,450 2,135 3,075 3,006 2,786 22.5% 22.5%

Average 0.0% 13.3%

Correlation with Market Actual 1.00 0.71 0.75 0.98 0.83 0.95 0.96 0.97 0.98 0.99

Correlation with Forecast 0.99 0.70 0.77 0.99 0.85 0.95 0.98 0.99 1.00 1.00

Mean Absolute Error 18.7% 17.9% 14.6% 16.3% 13.3%

Worst Error 56.9% 54.9% 35.2% 48.7% 35.9%

Parameters 30.0% 10.0% 50.0% 10.0% 100.0%

Volume Data Valuations Based On:Fcst Ratios of Price to:

Weighting Forecasts for Ratio Composite Value

SAMPLE



Compiling the Composite Ratio Model for Acme Investment Group from Four Sub-Models

This composite valuation of ratio models yields a model estimate that will be input into the Composite Model that follows.


30.0% 185.9 55.8 Price-to-AUM Model +

10.0% 328.6 32.9 Price-to-Sales Model +

50.0% 493.6 246.8 Price-to-Earnings Model +

10.0% 484.4 48.4 Price-to-Book Model

100.0% 383.9 Composite Ratio Model

Composite Ratio Model

=

SAMPLE


Valuation – Volume Model

Volume Valuation Model = 0.05 * Sales +

12.41 * Earnings +

0.41 * Book Value +

1.91 * Earnings forecast in 10 years

Valuation Model from Volumes

y = 0.9077x + 422.04

R2 = 0.9728

0

5,000

10,000

15,000

20,000

25,000

0 5,000 10,000 15,000 20,000 25,000 30,000

ForecastM

arke

t C

apit

aliz

atio

n

The Volume Valuation Model seeks to forecast market capitalization directly – not a ratio, so its independent variable choices are straightforward variable such as sales, earnings, book value, and future earnings. The choice of earnings forecasted in 10 years is intended to include a measure of growth in the model, so that at least one variable would be included from the three dimensions of Heritage, Skill, and Potential.

The model explains over 97% of the variability among the firms in the data set. For 10 of the 17 firms was the forecast within ±10%. Though on average, the model was calibrated to hit its target, the mean absolute error was 11%. Its largest error was for Gamco, where it overstated that firm’s ratio by 28%.

Significantly, the variable AUMs was not included in the model, since its value was overshadowed by the others.

SAMPLE




Mkt Book 10 YName Cap AUMs Sales Earn Value Earn FCST % Diff ABS

Affiliated Managers Group, Inc. 2,821 184,300 1,112 129 817 553 3,041 7.8% 7.8%

AllianceBernstein Holding LP 5,381 578,552 3,596 267 1,457 930 5,857 8.8% 8.8%

Ameriprise Financial, Inc. 10,882 446,000 7,796 528 7,341 1,942 13,641 25.3% 25.3%

AMVESCAP PLC (ADR) 7,861 419,000 3,132 246 3,621 1,328 7,220 -8.2% 8.2%

BlackRock, Inc. 8,522 463,000 1,583 258 989 1,316 6,199 -27.3% 27.3%

Calamos Asset Management, Inc 713 43,804 483 32 195 121 729 2.3% 2.3%

Cohen & Steers, Inc. 891 20,491 151 34 171 116 716 -19.6% 19.6%

Eaton Vance Corp. 3,376 88,569 846 164 489 560 3,339 -1.1% 1.1%

Franklin Resources, Inc. 22,799 504,000 5,019 1,111 6,543 4,154 24,636 8.1% 8.1%

Gamco Investor Inc. 1,009 26,798 251 70 411 124 1,286 27.5% 27.5%

Janus Capital Group Inc. 3,744 148,506 1,024 104 2,519 776 3,845 2.7% 2.7%

Legg Mason, Inc. 11,794 864,399 4,209 434 5,640 2,533 12,729 7.9% 7.9%

Nuveen Investments, Inc. 3,489 145,000 641 173 225 554 3,326 -4.7% 4.7%

T. Rowe Price Group, Inc. 10,360 269,493 1,721 453 2,171 1,413 9,295 -10.3% 10.3%

Waddell & Reed Financial, Inc. 1,858 44,852 692 62 265 333 1,542 -17.0% 17.0%

Federated Investors, Inc. 3,432 230,000 955 201 557 565 3,851 12.2% 12.2%Henderson Global Investors 2,274 67,860 523 86 1,165 406 2,343 3.0% 3.0%

Average 1.0% 11.4%

Correlation with Market Cap 1.00 0.71 0.75 0.98 0.83 0.99 0.99

Correlation with Forecast 0.99 0.70 0.81 0.99 0.88 0.99 1.00

Parameters 0.0000% 0.05 12.41 0.41 1.91

Forecasting Market Capitalization from Volumes


SAMPLE



Application of Volume Model to Acme Investment Group

This valuation will be included as part of the Composite Model that follows, along with the results from the DCF Model and the Composite Ratio Model.


0.05 52.50 2.6 Sales +

12.41 13.01 161.5 Earnings +

0.41 100.00 40.9 Book Value +

1.91 61.99 118.3 Earnings forecast in 10 years

323.3 Volume Model

Volume Valuation

Model=

SAMPLE


Valuation – Discounted Cash Flow

Discount Rates vs. Beta

y = 0.0059x + 0.1322

R2 = 0.1157

10%

11%

12%

13%

14%

15%

16%

17%

0.00 0.50 1.00 1.50 2.00 2.50 3.00

Beta

Dis

cou

nt

Rat

es f

rom

IRR

An

alys

is

To determine the relative value of making a valuation using discounted cash flow, several steps were taken with the 17 publicly-listed firms:

1. Year 1 EPS projections were the mean forecast made by Wall Street analysts, if available (15 of 17 firms had analyst estimates). Otherwise, current year EPS numbers were used.

2. Year 2 EPS estimates were also from Wall Street analysts, if available (15 had estimates). Otherwise, a growth rate was applied to Year 1 estimates.

3. Where available, the Long-Term Growth Rate from Wall Street was applied (for 15 firms, estimates were available). Otherwise, use the average of historical revenue and EPS growth rates. This growth rate was applied for years 3 through 10.

4. Beginning in year 11, a constant growth rate of 5.00% was used for all firms.

5. Rather than use a “terminal value,” as is often the case, the projections were extended through 200 years. This eliminates the need of assuming some sort of future PE ratio and also allows for slightly conservative – and known – growth assumptions. This is important, since roughly 40% of current value is determined by what happens after the tenth year.

With these annual projections of EPS and the current stock price, an IRR can easily be calculated. These IRRs have been regressed against the betas for all the firms, as shown in the graph below. This “model” was used to estimate a model discount rate for each firm. Using this model rate, the Net Present Value of the EPS estimates was calculated to determine the Discounted Cash Flow Valuation for each firm. The chart on the next page contains the summary calculations described here.

SAMPLE



NPV

Name IRR Price Value Beta Disc Per Shr Total 1 2 3 4 5 6 7 8 9 10 11+

Affiliated Managers Group, Inc. 15.26% 90.07 2,821 1.81 14.3% 100.98 3,163 5.68 6.60 7.46 8.44 9.54 10.79 12.20 13.80 15.61 17.65 52.42

AllianceBernstein Holding LP 14.23% 63.96 5,381 1.13 13.9% 66.77 5,618 3.59 4.19 4.73 5.34 6.03 6.80 7.68 8.67 9.79 11.05 35.56

Ameriprise Financial, Inc. 14.96% 44.53 10,882 1.31 14.0% 49.85 12,182 3.15 3.62 3.99 4.40 4.86 5.36 5.92 6.53 7.20 7.95 25.02

AMVESCAP PLC (ADR) 14.16% 19.21 7,861 2.68 14.8% 17.76 7,267 1.10 1.30 1.45 1.63 1.83 2.05 2.30 2.58 2.89 3.24 8.73

BlackRock, Inc. 13.19% 132.88 8,522 0.09 13.3% 131.24 8,417 5.22 7.19 8.20 9.35 10.66 12.15 13.85 15.79 18.00 20.52 74.86

Calamos Asset Management, Inc 13.99% 30.78 713 1.31 14.0% 30.74 712 1.62 1.88 2.14 2.43 2.76 3.14 3.56 4.05 4.60 5.23 16.45

Cohen & Steers, Inc. 12.15% 24.48 891 1.31 14.0% 18.80 684 0.85 1.18 1.34 1.52 1.72 1.94 2.20 2.49 2.83 3.20 10.07

Eaton Vance Corp. 13.75% 26.39 3,376 1.12 13.9% 25.94 3,318 1.29 1.54 1.75 2.00 2.28 2.60 2.96 3.37 3.84 4.38 14.10

Franklin Resources, Inc. 14.54% 87.70 22,799 1.14 13.9% 95.06 24,712 5.11 5.67 6.45 7.35 8.36 9.52 10.83 12.33 14.04 15.98 51.33

Gamco Investor Inc. 12.46% 35.06 1,009 1.02 13.8% 29.38 845 2.30 2.34 2.52 2.73 2.94 3.18 3.43 3.71 4.00 4.32 14.08

Janus Capital Group Inc. 14.99% 17.69 3,744 2.12 14.5% 18.89 3,998 0.72 1.02 1.20 1.41 1.65 1.94 2.27 2.66 3.12 3.66 10.50

Legg Mason, Inc. 15.73% 95.23 11,794 1.50 14.1% 115.73 14,333 5.41 6.78 7.78 8.93 10.26 11.77 13.52 15.52 17.82 20.45 62.99

Nuveen Investments, Inc. 13.63% 44.06 3,489 0.80 13.7% 43.70 3,461 2.34 2.73 3.07 3.45 3.89 4.37 4.92 5.53 6.22 7.00 23.42

T. Rowe Price Group, Inc. 12.62% 78.02 10,360 1.60 14.2% 63.32 8,408 3.78 4.33 4.85 5.42 6.07 6.79 7.60 8.50 9.51 10.64 32.38

Waddell & Reed Financial, Inc. 14.59% 21.92 1,858 1.40 14.1% 23.42 1,985 1.32 1.53 1.72 1.94 2.18 2.45 2.76 3.10 3.49 3.93 12.23

Federated Investors, Inc. 14.09% 32.12 3,432 0.67 13.6% 34.11 3,644 1.94 2.25 2.50 2.79 3.10 3.45 3.84 4.27 4.75 5.28 17.95

Henderson Global Investors 13.65% 1.39 2,274 1.31 14.0% 1.32 2,164 0.05 0.06 0.07 0.08 0.10 0.12 0.14 0.17 0.21 0.25 0.78

EPS Projected

Discounted Cash Flow Model

Current Market DCF


As described on the previous page, 200-year EPS estimates were calculated using Wall Street estimates for the first two years, Wall Street’s growth rates for the next eight years, and a flat 5% rate subsequently. A discount rate model was calculated, using the results from regressing IRR against Beta. Discount models are notoriously sensitive, and this approach seeks – among other things – to ascertain a good estimate of current market discount rates consistent with the growth assumptions. This discounting mechanism – and the long-term growth assumptions on which it is based – will be applied to Acme’s projected earnings.

SAMPLE



Discounted Cash Flow Model

y = 0.9047x + 370.19

R2 = 0.9806

0

5,000

10,000

15,000

20,000

25,000

0 5,000 10,000 15,000 20,000 25,000 30,000

ForecastA

ctu

al

Using assumptions described for determining a discount rate and long-term EPS estimates, the resulting discounted-cash-flow numbers were relatively consistent with actual market capitalizations.

When calculating Acme’s discount rate, we will use a beta of 2.50, which is at the upper end of the range for those firms studied.

The model yielded a mean absolute error of 9.0% and explains 98% of the variability.

SAMPLE



Assumptions for calculating the DCF Valuation

• Data for AUMs, income statement, balance sheet, and cash-flow statement were provided by Acme Investment Group.

• Ten year projections of earnings were created in conjunction with Acme.

• A beta of 2.50 was assumed. For the discount rate model developed earlier from market data, this equates to a discount rate of 14.70%.

• The Terminal Value for the end of Year 11 was determined by extending 10th year earnings at a 5% annual growth rate – the same as used in the analysis of publicly-listed firms. This equates to a P/E ratio of 10.3 as of year-end.

SAMPLE



Valuation from DCF Model = USD 442 million

This valuation will be included as part of the Composite Model that follows, along with the results from the Volume Model and the Composite Ratio Model.

Term Val2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jan 2016

Assets Under Manaagement (mm) 1,500 2,000 2,500 3,000 3,500 4,375 5,469 6,836 8,545 10,681 13,351 16,689 20,862 26,077

Revenue 22,500 30,000 37,500 45,000 52,500 65,625 82,031 102,539 128,174 160,217 200,272 250,340 312,924 391,155

ExpensesVariable Expenses 7,875 10,500 13,125 15,750 18,375 22,969 28,711 35,889 44,861 56,076 70,095 87,619 109,524 136,904 Discretionary Expenses 3,938 5,250 6,563 7,875 9,188 11,484 14,355 17,944 22,430 28,038 35,048 43,809 54,762 68,452 Fixed Expenses 2,825 3,700 4,575 5,450 6,325 7,856 9,770 12,163 15,154 18,892 23,565 29,406 36,708 45,835

Total 14,638 19,450 24,263 29,075 33,888 42,309 52,837 65,996 82,445 103,006 128,708 160,835 200,993 251,191

Gross Profit (EBITDA) 7,863 10,550 13,238 15,925 18,613 23,316 29,195 36,543 45,729 57,211 71,564 89,505 111,931 139,964

Interest 10 10 10 10 10 10 10 10 10 10 10 10 10 10 Depreciation 10 10 10 10 10 10 10 10 10 10 10 10 10 10 Net Profit (EBIT) 7,843 10,530 13,218 15,905 18,593 23,296 29,175 36,523 45,709 57,191 71,544 89,485 111,911 139,944

Taxes 2,353 3,159 3,965 4,772 5,578 6,989 8,752 10,957 13,713 17,157 21,463 26,845 33,573 41,983 Earnings (After-Tax) 5,490 7,371 9,252 11,134 13,015 16,307 20,422 25,566 31,996 40,034 50,081 62,639 78,338 97,961 1,060,233

Firm Value (BOY) w/Discount Rate of 14.70% 442,441 494,472 550,860 611,422 675,744 743,093 812,305 881,646 948,622 1,009,746 1,060,233

Acme Investment Group(USD 000 unless otherwise noted)

SAMPLE



2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

AUM Annual Growth 33.3% 25.0% 20.0% 16.7% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Revenue as % of AUMs 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%

Expenses as % of RevenuesVariable Expenses 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%Discretionary Expenses 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5%Fixed Expenses 12.6% 12.3% 12.2% 12.1% 12.0% 12.0% 11.9% 11.9% 11.8% 11.8% 11.8% 11.7% 11.7% 11.7%

Total 65.1% 64.8% 64.7% 64.6% 64.5% 64.5% 64.4% 64.4% 64.3% 64.3% 64.3% 64.2% 64.2% 64.2%

Gross Profit (EBITDA) as % of Rev 34.9% 35.2% 35.3% 35.4% 35.5% 35.5% 35.6% 35.6% 35.7% 35.7% 35.7% 35.8% 35.8% 35.8%

Net Profit (EBIT) as % of Rev 34.9% 35.1% 35.2% 35.3% 35.4% 35.5% 35.6% 35.6% 35.7% 35.7% 35.7% 35.7% 35.8% 35.8%

Earnings (After-Tax) as % of Rev 24.4% 24.6% 24.7% 24.7% 24.8% 24.8% 24.9% 24.9% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Acme Investment Group

SAMPLE


Composite: Volume, Ratio & DCF

The Composite Model – which represents the last quantitative step in the analysis prior to professional adjustments being made -- comprises the three individual models: DCF, Volume, and the Composite Ratio.

The model explains 98% of the variability among the firms in the data set. For 11 out of 17 firms, the forecast is within ±10%, and the model’s mean absolute error is 8%. Its largest error is for Cohen & Steers, where it understates that firm’s value by almost 22%.

The analysis suggests the importance of the DCF methodology, since it comprises more than 60% of the composite weighting. Analysts often using ratios as a way of quickly comparing different firms, but the analysis suggests its value is considerably less than old-fashioned accounting.

Composite Valuation = 50.0% * DCF Model +

37.9% * Volume Model +

12.1% * Composite Ratio Model

Valuations: Actual vs. Composite Forecast

y = 0.9107x + 366.86

R2 = 0.9824

0

5,000

10,000

15,000

20,000

25,000

0 5,000 10,000 15,000 20,000 25,000 30,000

Composite Forecast (DCF, Volumes, Ratios)M

arke

t C

apit

aliz

atio

n

SAMPLE




In determining the weights to be assigned to the three “orthogonal” models, the data support assigning the highest weight to the DCF Model, with 63%. However, judgment suggests that this should be constrained to no more than 50?%, so the Optimizer was re-run with this requirements, even though it adds slightly to the fitted error.

For each investment firm, the blue-shaded box highlights which of the three models came closest to forecasting market capitalization. As can be seen, each of the models had a fair number of successes.

The Composite Model has a mean absolute error of 8.7%.

Market Comp

Name Cap DCF Volumes Ratios Fcst % Diff ABS

Affiliated Managers Group, Inc. 2,821 3,163 3,041 3,003 3,097 9.8% 9.8%

AllianceBernstein Holding LP 5,381 5,618 5,857 5,977 5,752 6.9% 6.9%

Ameriprise Financial, Inc. 10,882 12,182 13,641 12,130 12,729 17.0% 17.0%

AMVESCAP PLC (ADR) 7,861 7,267 7,220 6,083 7,106 -9.6% 9.6%

BlackRock, Inc. 8,522 8,417 6,199 6,606 7,357 -13.7% 13.7%

Calamos Asset Management, Inc 713 712 729 740 722 1.3% 1.3%

Cohen & Steers, Inc. 891 684 716 744 704 -21.0% 21.0%

Eaton Vance Corp. 3,376 3,318 3,339 3,325 3,327 -1.5% 1.5%

Franklin Resources, Inc. 22,799 24,712 24,636 24,900 24,706 8.4% 8.4%

Gamco Investor Inc. 1,009 845 1,286 1,203 1,056 4.7% 4.7%

Janus Capital Group Inc. 3,744 3,998 3,845 3,539 3,884 3.8% 3.8%

Legg Mason, Inc. 11,794 14,333 12,729 12,576 13,513 14.6% 14.6%

Nuveen Investments, Inc. 3,489 3,461 3,326 3,582 3,424 -1.9% 1.9%

T. Rowe Price Group, Inc. 10,360 8,408 9,295 9,472 8,873 -14.4% 14.4%

Waddell & Reed Financial, Inc. 1,858 1,985 1,542 1,191 1,721 -7.3% 7.3%

Federated Investors, Inc. 3,432 3,644 3,851 4,118 3,780 10.1% 10.1%Henderson Global Investors 2,274 2,164 2,343 2,786 2,307 1.4% 1.4%

Average 0.5% 8.7%

Correlation with Market Cap 1.00 0.99 0.99 0.99 0.99

Correlation with Forecast 0.99 1.00 1.00 1.00 1.00

Mean Absolute Error 9.0% 11.4% 13.3% 8.7%

Worst Error 23.2% 27.5% 35.9% 21.0%

Parameters from CMOC 50.0% 37.9% 12.1% 100.0%

Composite Valuation Model

Three Models

SAMPLE



Discrepancies: Actual Values vs. Composite Model

-14.4%

-13.7%

1.4%

3.8%

4.7%

6.9%

9.8%

14.6%

-21.0%

8.4%

1.3%

-1.9%

-9.6%

10.1%

-1.5%

17.0%

-7.3%

-30% -20% -10% 0% 10% 20%

Cohen & Steers, Inc.T. Rowe Price Group, Inc.

BlackRock, Inc.AMVESCAP PLC (ADR)

Waddell & Reed Financial, Inc.Eaton Vance Corp.

Nuveen Investments, Inc.Gamco Investor Inc.

Henderson Global InvestorsCalamos Asset Management, Inc

Janus Capital Group Inc.AllianceBernstein Holding LP

Franklin Resources, Inc.Federated Investors, Inc.

Affiliated Managers Group, Inc.Ameriprise Financial, Inc.

Legg Mason, Inc.

< - - - Market Value is Higher ------- Model Value is Higher - - - >

SAMPLE



Compiling Acme’s Composite Valuation from Three Models

This Composite Model reflects all quantitative inputs to the Acme valuation. All that remains is to make appropriate adjustments for Acme’s unique situations that are not reflected in market data.


50.0% 442.4 221.2 DCF Model +

37.9% 323.3 122.6 Volume Model +

12.1% 383.9 46.4 Composite Ratio Model

100.0% 390.2 Composite Valuation

Composite Valuation

=

SAMPLE


Adjustments to Valuations

• Large Buyer

• Belgium versus world

• Illiquid shares versus liquid shares

SAMPLE


Adjustments to ValuationsIs Belgium different?

According to MSCI indices, there is not a substantial difference in the valuation ratios for markets in Belgium when compared to the rest of the world. Consequently, there appears to be no reason to add a premium or make a discount strictly on the basis of buying or selling a company in Belgium.

5-Year

Yield Book Value Cash Flow Earnings Annual Return

Total Market Developed Markets 2.10% 2.7 11.1 17.6 4.6%

Emerging Markets 2.30% 2.5 9.9 15.3 24.1%

Belgium 1.30% 2.6 11.3 15.8 47.9%

Financials Developed Markets 2.70% 2.1 14.2 14.9 7.3%


Diversified Financials Developed Markets 2.30% 2.4 13.8 15.3 6.2%


Source: MSCI April 2006

Ratio of Price to:

Valuation Ratios for MSCI Markets

SAMPLE


Adjustments to Valuations

Final Adjustments to Acme’s Composite Model

This value reflects our recommendation for Acme’s valuation and includes both quantitative and qualitative input. As with any forecast, there is a range of error that is unavoidable. We estimate that the statistical range for this forecast is ±15%.


390.2 Composite Valuation

-10% 390.19 -39.0 Liquidity Adjustment

10% 390.19 39.0 Large Buyer Adjustment

10% 390.19 39.0 Belgian Market Adjustment

429.2 Recommended Valuation

Adjusted Valuation

=

SAMPLE


Recommended Acme Valuation

Though a valuation recommendation necessarily must land on a single number, the chart at left indicates that there can be varying viewpoints within a range.

In this case, the valuation assigned by the Price-to-AUM model appears too far outside the range to be credible, so a reasonable range is probably from $34-51 million.

Valuation AUMs Sales Earn BV

Price-to-Earnings Sub-Model 493.6 14.10% 9.40 37.9 4.94

Price-to-Book Sub-Model 484.4 13.84% 9.23 37.2 4.84

DCF Model 442.4 12.64% 8.43 34.0 4.42

Recommended Valuation 429.2 12.26% 8.18 33.0 4.29

Composite Valuation 390.2 11.15% 7.43 30.0 3.90

Composite Ratio Model 383.9 10.97% 7.31 29.5 3.84

Price-to-Sales Sub-Model 328.6 9.39% 6.26 25.2 3.29

Volume Model 323.3 9.24% 6.16 24.8 3.23

Price-to-AUM Sub-Model 185.9 5.31% 3.54 14.3 1.86

Ratio of Price to:

Summary of Valuation Models

SAMPLE


Notes

Edward A. Strohbehn

Ed Strohbehn has spent the past 25+ years on Wall Street -- a period that has seen no less than eight significant bear markets or market corrections -- gaining experience in each of its major areas: an investment firm, a bank, an insurance company, and a hedge fund. Though his education is in mathematics, his experience has tended to be broadly based, covering the areas of management, new product & business development, investment advice, marketing, sales support and operations, in addition to his interest in quantitative models. For the most part, his career has focused on international institutions, clients and distribution teams.

INVESTMENT CAREER 1981-1991 -- Merrill Lynch & Co., including two years at Riyad Bank in Saudi Arabia 1991-1992 -- Oppenheimer & Company 1992-1996 -- Strohbehn & Co., Inc. 1996-1998 -- Coutts Bank 1998-2000 -- Consultant to 12 new businesses 2000-2004 -- Prudential Financial, Inc. 2004-2005 -- Calyx Financial LLC 2005+ -- Strohbehn, Hall, Olson & Evans LLC

For additional information, please visit www.shoeLLC.com

SAMPLE


Notes

Custom Model Optimization with Constraints (CMOC) versus Standard Linear Regression

Many multivariate models are developed using linear regression techniques. Sadly, regression often disappoints, especially when sample sizes are small or variables are highly correlated. In these situations, it is often observed that regression techniques over explain the data, yielding models that are less useful when applied to data outside the sample.

This valuation project reflects limited sample sizes – the number of publicly-listed pure asset management firms with reliable data is less than two dozen. And the variables can sometimes reflect self-selecting management decisions, so that correlations are difficult to wade through.

Consequently, SHOE LLC uses a customized methodology that seeks to achieve regression’s goals while being more robust – less affected by individual outliers, for example. Whereas regression seeks to choose a set of parameters so that the sum of the squares of the residuals (difference between model and actual values) is minimized. SHOE’s constrained model optimization works to choose a set of parameters as follows: (1) Minimize the average absolute residual, calculated by taking the absolute value of the difference between the model and actual values; (2) Establishing the constraint that all coefficients must be non-negative. Thus, any variable that seeks to over-explain its cohorts by being negative is automatically eliminated from the model; and (3) Establishing the additional constraint that the average residual is “close” to zero. That is, the average model result is never far from the average actual result.

When using this methodology to create composite models, an additional constraint may be imposed that requires that all or most of the sub-models be included in the composite. Theoretically, this is sub-optimal. However, in a world where out-of-sample data is ultimately being analyzed, model “diversification” seems to have value that cannot easily be quantified.

All these methods are put through a regression check when finished, to ensure that the relationship is statistically significant, even though tests are not available to confirm the statistical validity of each individual parameter.

SAMPLE


Notes

Standard Linear Regression

• Choose coefficients using mathematical analysis of data points.

• Minimize the sum of the squares of the residuals.

• No other constraints.

Custom Model Optimization with Constraints

• Choose coefficients (a.k.a. parameters) using mathematical analysis of data points.

• Minimize the sum of the absolute values of the residuals.

• Subject to these constraints:

– All coefficients > 0 or automatically dropped from the model

– Average residual = 0 (or close)

– If choosing weights, then sum of the weights = 100%.

Notes

“Residuals” refers to the difference between model and actual values. In the usage here, there is no difference intended between a “coefficient” and a “parameter”. By minimizing the sum of the squares of the residuals, linear regression techniques tend to try to give extra weight to extreme data. This extra weighting is reduced through the objective function used in the Constrained Parameter Optimization, which treats all differences proportionately. Linear regression uses matrix algebra to compute its solutions. Constrained Model Optimization uses iterative numerical techniques; practically, the Solver Function in EXCEL is sufficient.

SAMPLE


Notes

This simple example compares the two techniques: regression and CMOC. The dependent variable is the left-hand column “Mkt Cap.” The independent variables are in the next four columns: sales, earnings, book value, and AUMs.

The next section shows calculations for standard linear regression, while the final section shows the calculations for CMOC: the model forecast plus three measures of error. Blue shading indicates where one model seems superior.

For regression, the coefficient for sales is negative, which immediately renders the model useless, since increasing sales should NOT cause market capitalization to go down.

Looking at individual forecasts suggests the superiority of CMOC. Regression produced two superior forecasts, while CMOC prevailed in five. The other ten were similar.

The regression approach generated forecasts that, in aggregate, were 2.1% away from actual values, while CMOC generated forecasts that were, in aggregate, not skewed.

Finally, the mean absolute error was reduced to 14.4% for CMOC versus 15.2% for regression – in spite of a significant increase in the sum of the squares of the residuals.

Regression: FCST = –.6984 * Sales + 18.136 * Earn + .5950 * Book + 0.52% * AUMs

CMOC: FCST = 17.369 * Earn + .6222 * Book + 0.10% * AUMs

Mkt Book

Cap Sales Earn Value AUMs Fcst % Diff ABS (%) Sq. Diff Fcst % Diff ABS (%) Sq. Diff

2,821 1,112 129 817 184,300 2,997 6.2% 6.2% 31,075 2,929 3.8% 3.8% 11,746

5,381 3,596 267 1,457 578,552 6,185 14.9% 14.9% 646,972 6,121 13.8% 13.8% 547,571

10,882 7,796 528 7,341 446,000 10,805 -0.7% 0.7% 5,945 14,186 30.4% 30.4% 10,912,242

7,861 3,132 246 3,621 419,000 6,594 -16.1% 16.1% 1,606,654 6,945 -11.7% 11.7% 840,139

8,522 1,583 258 989 463,000 6,561 -23.0% 23.0% 3,848,332 5,565 -34.7% 34.7% 8,744,766

713 483 32 195 43,804 583 -18.3% 18.3% 16,947 718 0.8% 0.8% 30

891 151 34 171 20,491 711 -20.2% 20.2% 32,470 710 -20.3% 20.3% 32,749

3,376 846 164 489 88,569 3,124 -7.5% 7.5% 63,695 3,233 -4.2% 4.2% 20,405

22,799 5,019 1,111 6,543 504,000 23,140 1.5% 1.5% 116,421 23,871 4.7% 4.7% 1,148,719

1,009 251 70 411 26,798 1,477 46.4% 46.4% 219,011 1,498 48.5% 48.5% 239,482

3,744 1,024 104 2,519 148,506 3,429 -8.4% 8.4% 99,396 3,514 -6.1% 6.1% 52,756

11,794 4,209 434 5,640 864,399 12,752 8.1% 8.1% 916,863 11,909 1.0% 1.0% 13,220

3,489 641 173 225 145,000 3,570 2.3% 2.3% 6,579 3,287 -5.8% 5.8% 40,901

10,360 1,721 453 2,171 269,493 9,705 -6.3% 6.3% 428,874 9,495 -8.3% 8.3% 747,593

1,858 692 62 265 44,852 1,024 -44.9% 44.9% 694,789 1,281 -31.1% 31.1% 332,984

3,432 955 201 557 230,000 4,506 31.3% 31.3% 1,153,380 4,075 18.7% 18.7% 413,6642,274 523 86 1,165 67,860 2,236 -1.7% 1.7% 1,482 2,284 0.4% 0.4% 93

SLR -0.6984 18.1360 0.5950 0.52% Sum -36.3% 257.9% 9,888,886 Sum -0.2% 244.3% 24,099,061

CMOC 0.0000 17.3690 0.6222 0.10% Avg -2.1% 15.2% 581,699 Avg 0.0% 14.4% 1,417,592

Comparing Regression and CMOC Methodologies

Custom Model OptimizationStandard Linear Regression

SAMPLE


Notes

• Strohbehn, Hall, Olson & Evans LLC (SHOE LLC) is a private investment firm that assists firms in growth and transition, providing what Ed Strohbehn refers to as “tugboat services.” The firm is named for his four grandparents and is a single-member limited-liability corporation domiciled in New York state. Additional information is available at www.shoeLLC.com.

• SHOC LLC is not registered as a broker-dealer with the National Association of Securities Dealers nor as an investment adviser with the United States Securities and Exchange Commission.

• All forecasts and models have been prepared with strict, professional care; however, any forecast is subject to unknown influences and future forces beyond control, so no guarantee can be made by SHOE LLC that results will be as expected. Statistical or random errors can increase as projections are made outside the sample from which model parameters were estimated.

• Information included in this report has been taken from sources believed to be reliable, including Reuters, Pensions & Investments, and Hoover’s; however, no information can not be guaranteed by SHOE LLC to be accurate beyond what is promised by the suppliers.

• All securities prices as of close of business on May 31, 2006.

sample valuation of acme investment group

Documents

earnings ratio price

valuation ratio models

sales ratio price

aum ratio price

market overview source

introduction market

market value

ratios models