A client of ours is looking to invest a significant minority stake in a diversified specialty finance company. Half of their income comes from purchasing and selling factoring receivables (so like most non-banks, the company is highly leveraged, since they need the debt to purchase the receivables) and the other half is fee-based income. In this case, I think it's best to calculate the equity value, instead of EV, but I was wondering which is more common in the case of a non-bank, specialty finance company. There's no regulated capital like banks, so if I were to do DDM, then I would also have to come up with a rationale on whether to set a minimum capital ratio for the projections or just have all of the Net Income back into the dividends issued. Equity DCF (FCFE) sounds more reasonable for non-banks but projecting the debt servicing/capex for FCFE sounds difficult (please correct me if I'm wrong).
If anyone has done valuation of a non-bank/specialty finance company, could you please explain how you valued the company? Also, if anyone has ever done an lbo model for a specialty finance company, any explanation regarding differences between that and a regular company would be much appreciated.
Any advice, tips, etc. would be helpful. Thanks in advance!
You want to use a DDM for specialty finance companies(BS lenders).
If it is a more mature company I would look at the historical debt to equity ratio and keep that constant. Another option would be to look at the debt covenants and figure it out that way.
However you figure out what the minimum equity needed you will need to make sure that base is satisfied and pay the rest of the earnings out as a dividend.
I have only built out on full lbo model for a spec fin company so I am not sure if my experience would be helpful but my one point of advice is to pay attention to the debt needed to run the business and the amount of debt a sponsor can actually put on the business.
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