With oil prices hovering in the high 30’s, we may be trying to get our wealthier folks to value their royalty interests and give them away as gifts this year.
So here’s the situation–We have a limited partnership that has nothing but O&G royalties, and we want to split it between Johnny (49.5%), Suzie (49.5%), with Daddy retaining a 1% GP ownership. Should we get valuations done for each one of the kid’s positions? I would assume that the value of both of the 49.5% positions would be less than the value of the entire 99% position, because you get to take discounts for lack of control, marketability, etc.
Anybody here who does BVal have an opinion on this?
Wouldn’t it depend on the LP agreement, and basically the answer to “what can a 99% holder do that a 49.5% can’t?” Just throwing it out there for discussion, I’m rusty, not qualified to answer… If you need a valuation guy in central tx, send me a pm.
As HP said, it depends on the partnership agreement. Most likely, dad’s 1% GP interest has 100% control, so there really is no difference in marketability and control for 49.5% versus 99%. Regardless though, you should get each of the kid’s positions valued separately (really just separate reports) so the other isn’t pulled into the fray if one of them gets audited.
^ditto. Expanding just a bit on higgmond’s comments, a 99% limited partnership interest could (probably is) a minority ownership interest desipte owning the large majority of the LP. If a GP/LP structure, the GP typically retains all the power. Need to be aware though if the LP’s can get rid of the GP. All depends on the terms of the LP Agreement, and this is really contingent on having a good lawyer (even though most of the agreements read the same).
It has been a while, but the GP is the controlling interest (you need to read the partnership agreement) and you are valuing a 49.5% LP interest. Two seperate reports but essentially the same report with the name on one Suzie and the other Johnny. Forr the LP interest you can take lack of control and marketability discounts. The great american way for the wealthy to transfer their wealh to minimize taxes through a family limited partnership.
how are the discounts determined? Is there a set of comparables where you can triangulate a discount for certain provisions? Seems like it would be very difficult to get the information needed to make this determination.
There are a number of ways. Just a few:
DLOM: Protective put, Asian put (aka the Finnerty model), look-back put (aka the Longstaff model), pre-IPO studies
DLOC: MergerStat Control premium study, discounts to NAV for closed-end ETFs, studies if actual LP transactions (Partnership Profiles is the main one if I remember correctly), there are also some studies of transactions in voting vs. non-voting stock
I’m sure there are some that I’m forgetting.