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Valuation and Targets

Our approach to valuations and targets for the portfolio takes into account recommendations made by the PAC in their report of September 2007. In summary, these were:

  • our performance management regime should include measures wider than an aggregated portfolio-level target, based on the results of individual businesses;
  • we should set business-level dividend targets so that, over time, a greater flow of dividends can be returned to the taxpayer; and
  • although it was not cost-effective to conduct valuations of all our businesses on an annual basis, we should systematically undertake valuations of the businesses in our portfolio every few years.

In summary, the principal elements of our target framework and valuations methodology are as follows:

Targets: As indicated in the PAC report, these targets focus on the individual businesses themselves, in respect of:
  • Economic profit – Based on agreed costs of capital for each of our portfolio businesses, measuring the Economic profits ensures that all businesses are covering their cost of capital;
  • Bespoke performance targets – Targets have been developed, working in conjunction with management teams, which relate to drivers of value, thereby ensuring longer term value creation across the portfolio. These targets cover a variety of issues, including: sales growth and margin expansion, improved levels of return and effective working capital management.
  • Dividends – Each business will have an agreed dividend target, except where public policy does not require or enable this; and

Valuation: In line with the PAC recommendations, the entire portfolio is valued over a two year cycle. The methodology used complies in all material respects with the international private equity and venture capital valuation guidelines endorsed by both the British Venture Capital Association and the European Private Equity and Venture Capital Association. These individual valuations are used, as per the PAC recommendations, to highlight the impact of policy on shareholder value.

Further information on the international private equity and venture capital valuation guidelines can be found on their website: www.privateequityvaluation.com