How do you conservatively estimate the value of illiquid assets on a company's balance sheet?

[blakehampton]

I have been cutting the reported value of illiquid assets in half but was curious what you all might think.

[blakehampton]

Another good question is how do you all factor book value into a margin of safety? I feel that if you are looking at a company selling at less than half of liquid assets, there should inherently be little risk outside of huge managerial incompetence.

[thepupil]

this is case by case. illiquid assets could be well covered 1st lien loans / mortgages that just don't have an established market...or they could be worthless venture capital assets...or they could be land held at 1920's prices or they could be well anything..."illiquid assets" is simply too broad a category for any one method to be able to approach anything useful. 

[Gregmal]

Yea totally depends on the assets. It helps being familiar with the individual assets too. A vintage Porsche, a private market warrant, BC era coin, and a mitigate bank are all solid assets but Im not sure I know anyone who's an expert on all 4. Gotta get your hands dirty and sometimes seek out expert opinions. 

[blakehampton]

54 minutes ago, thepupil said:

this is case by case. illiquid assets could be well covered 1st lien loans / mortgages that just don't have an established market...or they could be worthless venture capital assets...or they could be land held at 1920's prices or they could be well anything..."illiquid assets" is simply too broad a category for any one method to be able to approach anything useful. 

43 minutes ago, Gregmal said:

Yea totally depends on the assets. It helps being familiar with the individual assets too. A vintage Porsche, a private market warrant, BC era coin, and a mitigate bank are all solid assets but Im not sure I know anyone who's an expert on all 4. Gotta get your hands dirty and sometimes seek out expert opinions. 

Inventory?

[ValueArb]

Start at zero, and then carefully increase based on research. Typically this is what I do with balance sheets.

 

1) Accept most current assets at listed value, except for inventories and sometimes accounts receivable. Inventories I will haircut situationally, are they something that can be rapidly input into products and sold? If so I might take them at close to balance sheet value. I usually take accounts receivable at 100% but if the business or its customers seem sketchy (or they've had problems collecting) I'll haircut it. 

2) Ignore all intangibles.

3) PPE I will go through by hand. Examples are improvements to leased property is a zero, but lab and computer equipment I might take at 50%.  

4) Real estate I'll look for comps, as @thepupil said they can be held at some very old purchase prices and be worth far more today, even office buildings.

5) Collectible cars is just a sign that this isn't a management team that shares my capital allocation standards;)

[bizaro86]

2 hours ago, ValueArb said:

Start at zero, and then carefully increase based on research. Typically this is what I do with balance sheets.

 

1) Accept most current assets at listed value, except for inventories and sometimes accounts receivable. Inventories I will haircut situationally, are they something that can be rapidly input into products and sold? If so I might take them at close to balance sheet value. I usually take accounts receivable at 100% but if the business or its customers seem sketchy (or they've had problems collecting) I'll haircut it. 

2) Ignore all intangibles.

3) PPE I will go through by hand. Examples are improvements to leased property is a zero, but lab and computer equipment I might take at 50%.  

4) Real estate I'll look for comps, as @thepupil said they can be held at some very old purchase prices and be worth far more today, even office buildings.

5) Collectible cars is just a sign that this isn't a management team that shares my capital allocation standards;)

Even inventory I think you need to take on a case by case basis. 

 

If it's a tank full of crude oil market price is fine.

 

If it's a warehouse full of clothes that didn't sell when they were new/in-season then zero minus cost of disposal might be liquidation value.

[Ross812]

The assets are only worth the future cash flows they will produce discounted using whatever interest rate you are comfortable with. The problem with a lot of these assets is there are no plans to monetize them so how do you discount them?

 

Take a made up real life smaller example. I collateralize my home worth 1M at today's assessed value and should at least match inflation + 2% as it is in a hot area. I retain controlling interest. I rent it out occasionally on AirBnB and show you the cash flow of 40k/year which I use to pay for expenses and give myself a small salary for management. I can sell/give my controlling interest to  another party (my heirs) if I want to. How much do you pay for a 49% share of my home? 

 

Its certainly not worth 490k. 250k?  20 years down the line the asset will be worth 3.2M (assuming a 6% ROI) but I will still have no plans to sell it and monetization will be in line with inflation. You are hopeing one day I get tired of controlling it and sell the entire stake to someone else - including your stake at market value. 

[blakehampton]

2 hours ago, Ross812 said:

The assets are only worth the future cash flows they will produce discounted using whatever interest rate you are comfortable with. The problem with a lot of these assets is there are no plans to monetize them so how do you discount them?

 

Take a made up real life smaller example. I collateralize my home worth 1M at today's assessed value and should at least match inflation + 2% as it is in a hot area. I retain controlling interest. I rent it out occasionally on AirBnB and show you the cash flow of 40k/year which I use to pay for expenses and give myself a small salary for management. I can sell/give my controlling interest to  another party (my heirs) if I want to. How much do you pay for a 49% share of my home? 

 

It’s certainly not worth 490k. 250k?  20 years down the line the asset will be worth 3.2M (assuming a 6% ROI) but I will still have no plans to sell it and monetization will be in line with inflation. You are hopeing one day I get tired of controlling it and sell the entire stake to someone else - including your stake at market value. 

This is a good point. However, in the situation of a publicly traded company, couldn't someone come and buy a majority ownership and sell it themselves?

[ValueArb]

2 minutes ago, blakehampton said:

This is a good point. However, in the situation of a publicly traded company, couldn't someone come and buy a majority ownership and sell it themselves?

 

Once you get to 5% you have to start filing with the SEC and disclose intentions. When you get to 10% things start to get dicey, and companies will start instituting poison pills to make it suicidal for you to buy additional shares. Unfortunately our current securities laws do more to entrench boards than they do to protect shareholders or make the market efficient.