Rich List valuer Neville Glaser says while an accurate valuation of private wealth is nigh on impossible, the laws of probability help to get the valuation within a believable range.
Here are some techniques we use:
• Where the wealth was created in a private company that was subsequently sold, the value of the family is established at the date of sale and then incrementally increased from year to year if the family appears to conserve their wealth. If they launch into risky ventures that aren’t paying off, the wealth can be incrementally reduced from date of sale.
• If the wealth is in a large private company, still owned by the family, and no value has ever been placed on the business, some detective work is needed. First, we look for benchmarks like any turnover figures available, check what the profit margin percentage is on similar listed companies. From that, we calculate annual profit. We apply an industry PE (price-earnings) ratio to profit to get the value of the business. A reasonable after-tax profit margin for a large building group is 5%.
• Property development: The starting point for property developers is that they use the bank’s money and make a small margin, and virtually all of them will eventually be caught on the wrong side of a development and go bust or go dormant. Exceptions are the old developers with a track record of decades of successful development, who will have real capital invested in their business.
• Property investors: Again, property investors only become truly wealthy if they have outlived several cycles and repeatedly bought into depressed markets (Sir Robert Jones). New wealth in the property market is usually highly leveraged with bank debt.
• Overseas wealth: Seriously wealthy New Zealanders who made good overseas, like Graeme Hart, Stephen Jennings and the Chandlers tend to appear in overseas rich lists such as Forbes and the UK Sunday Times. The Forbes valuations have consistently seemed over stated, but we use the overseas lists as a benchmark nonetheless. With these people, movement in the currency can make a big difference.
• Old money versus new money: One key indicator of wealth is when the wealth was created. Old money that is passed from generation to generation carries little debt and can be valued close to asset value. New money, particularly property wealth, is usually created on the back of a lot of debt and these assets have to be heavily discounted.
• Where the subject confirms his own wealth: Feedback, letters and comments from subjects who claim higher values are taken seriously, but more credence is given to conservative people not known for speaking up their wealth.
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