First Chicago Method

It is a variation of the Venture Capital method. Since business projections for start up and early stage companies really are guess based, the First Chicago approach simply does three cases of projections: Best, Worst and Expected cases and attempts to assign probability estimates to each i.e. Best 25% chance, Worst 35% chance and Expected 40% chance. The First Chicago method results in a separate valuation and pricing for each of the three outcomes. These are then averaged and the valuation and pricing is determined.

First Chicago Method (Illustration)

Current revenue of the company= $ 2 million

Success 1.
2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Sideways survival 15%

3.04 4.02 5.32 (acquisition) 7% 0.37 7 2.59 0.25 40% 0.1 2 -

Failure 0%

Revenue growth rate

Revenue after 3 years Revenue after 5 years Revenue after 7 years After-tax profit margin Earnings at liquidity P/E ratio at liquidity Value of company at liquidity PV of company using discount rate of 40% Probability of each scenario Expected PV of company under each scenario

60%
8.19 20.97 (IPO) 15% 3.15 17 53.55 9.96 40% 3.98

5% 0.1 5 0.5 0.18 20% 0.036

All figures are in million $

Expected PV of the company = $ 4.12 million

Hedge Fund regulations

Any fund operating as hedge fund shall be required to be registered as a strategy fund under AIF regulation.

Restricting Participation The minimum size of the AIF shall be Rs20 crore with a minimum investment of Rs1 crore or 0.1% of the fund size whichever is higher.
Hedge funds would be allowed to use leverage subject to a maximum leverage specified by the board. HFs would have to disclose information regarding the overall level of leverage employed, the leverage arising from borrowing of cash or securities, from position held in derivatives and the main source of leverage in their fund. HFs would be allowed to invest in complex structural products and in derivatives. PIPE (acronym for private investment in public equity) investments would be restricted to shares of small sized listed companies which are not in any of the market indices.

They may be allowed access to non-public information while carrying out due diligence for PIPE transactions under a confidentiality agreement with restriction in dealing in securities for a particular time frame.

Hedge Fund regulations contd.

The total investment in venture capital funds cannot exceed Rs250 crore and the fund is not allowed to invest in any company promoted by any of the top 500 listed companies by market capitalisation or by their promoters. The fund or any scheme of the fund shall not have more than 1000 investors The AIF would not be allowed to invest in certain companies such as NBFCs and certain gold financing companies

Trading in secondary market Units of AIF may be listed on stock exchange subject to a minimum tradable lot of rupees 1 crore. However, AIF shall not raise funds through stock exchange mechanism Against concentration and speculation HFs shall invest not more than 10% of the corpus in one investee company
AIFs shall not invest in associates except with the approval of 75% of investors by value of their investment in the AIF