U.S.

PRIVATE EQUITY VALUATION GUIDELINES

Private Equity Industry Guidelines Group

August 2003

PEIGG - U.S. PRIVATE EQUITY VALUATION GUIDELINES

Table of Contents

Paragraph I. Overview II. Introduction Fair Value Concept Valuation Policy Committee 1-12 1-3 4-10 11-12 13-36 13-19 20-27 28-29 30-34 35 36 37-40 41 42-45 Page Appendix I Background Appendix II PEIGG Members 12 13

Private Company Valuation Methodologies General Guidelines Cost / Latest Round of Financing Comparable Company Transactions Performance Multiple Other Valuation Methodologies Subjective Value Determinations

III. IV. V.

Valuation of Public Securities Other Valuation Matters Conclusion

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I.

OVERVIEW

Introduction 1. As the U.S. private equity industry (defined as venture, buyout, mezzanine, and other investments in private companies) has grown and matured, its participants have become increasingly interested in the appropriate reporting of fund values. The interest stems from a number of sources, such as an investors desire to measure interim performance or a managers need to measure valuations per fund agreements to determine the allocation of distributions of early fund realizations. This has led to increased scrutiny of portfolio company values and the need for greater consistency of valuation methodologies employed by managers of private equity funds. However, by its very nature private equity is an asset class in which judgment plays a significant role. Accordingly, investors in the same company may have different, but supportable, views on valuation. The objective of the U.S. Private Equity Valuation Guidelines (Guidelines) is to provide managers a framework acceptable to investors for valuing investments in portfolio companies and to provide greater consistency within the private equity industry with regard to valuations. The Guidelines were created jointly by managers (i.e., general partners) and investors (i.e., limited partners) incorporating feedback from a wide number of industry participants. The Guidelines are not intended to be all encompassing, nor are they intended to eliminate all subjectivity. Rather, they are to be a guide to assist managers and investors in agreeing to a valuation framework while allowing a manager to exercise its best judgment in applying the Guidelines. Included in these Guidelines are terms that are subjective in nature and could have different meanings in various situations. While it is outside the scope of these Guidelines to force specific definitions upon its users, the manager in consultation with the Valuation Policy Committee (as discussed below) may develop and document appropriate definitions of these and other subjective terms, including materiality, as they apply to portfolio investments.

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3.

Fair Value Concept 4. The Guidelines seek to have all investments in portfolio companies reported at fair value on a consistent, transparent and prudent basis. Fair value as defined in accordance with U.S. generally accepted accounting principles (GAAP) is the amount for which an asset or liability could be exchanged (or settled) in a current transaction between knowledgeable unrelated willing parties when neither is acting under compulsion. The objective is to estimate the exchange price at which hypothetical willing marketplace participants would agree to transact.

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5.

GAAP uses a hierarchy in determining fair value for financial transactions, which is based on the quality of evidence supporting the fair value measurement. Quoted market prices in active markets are the best evidence of fair value and should be used as the basis for measurement, if available. If a quoted market price is not available, the estimate of fair value should be based on the best information available, including prices for similar investments and the results of using other valuation methodologies as discussed throughout these Guidelines. Securities of private companies, by definition, will not have quoted market prices available. However, private companies will often engage in arms-length cash transactions for issuances of their equity or debt securities, and the cash exchanged in these transactions, under certain circumstances, will serve as an observable market price similar to a quoted market price. These circumstances require that the transaction is a current transaction between willing parties for the same securities as those for which the fair value determination is being made. When quoted market prices or arms-length cash transactions as described above are not available, the estimate of fair value should incorporate all available information about the business and utilize assumptions that market participants would use in their estimates of value. The estimate of fair value should seek to best replicate the amount at which the investment could be bought or sold in a current transaction between willing parties. In certain instances where fair value estimates cannot be reasonably determined on a reliable basis in accordance with paragraphs 13-35, the manager will need to consider events and other factors as outlined in paragraph 36. These events and other factors may need to be taken into consideration in subjectively determining whether a change in valuation is warranted. In determining the fair value of individual investments using these Guidelines, managers are expected to use their judgment. In utilizing judgment, substance takes precedence over form. For example, when a managers past experience indicates that liquidation preferences will likely be renegotiated or may not be fully enforced at the time of liquidation, the manager is strongly encouraged to use the expected results rather than the form of the agreement. In order for financial statements to be in accordance with GAAP, valuations need to be updated whenever financial statements are prepared, commonly on a quarterly basis. Additionally, managers should perform a rigorous review of valuations on an annual basis presumably in conjunction with the preparation of the annual audited financial statements or when required by the fund agreement. Valuations used for annual and quarterly performance reporting should also be used in private placement memorandums and other marketing material.

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Valuation Policy Committee 11. These Guidelines acknowledge the perception that bias exists or has the potential to exist in a non-independent (versus independent) valuation performed by a funds manager. As a result, it is recommended that the manager of each private equity fund establish a Valuation Policy Committee consisting of a subset of the funds investor representatives. The Valuation Policy Committee could be all of, or a portion of, a funds advisory committee, if such a committee exists. The fund manager, in consultation with the Valuation Policy Committee, should establish the written valuation parameters to be followed by the funds manager using these Guidelines. The agreed upon valuation policy and deviations from that policy should be communicated to the Valuation Policy Committee and the limited partners by the manager. Private equity fund managers are solely responsible for valuing their investments in portfolio companies and the Valuation Policy Committee will not set, formulate or approve the valuations, except as required by the limited partnership agreement. The Valuation Policy Committee will monitor the level of the managers adherence to the funds policy parameters. PRIVATE COMPANY VALUATION METHODOLOGIES

12.

II.

General Guidelines 13. Managers are to fairly value in accordance with GAAP the investments in their portfolio companies on a prudent and consistent basis. Since value is generally realized through a liquidity event of the entire company, the value of the company as a whole at the reporting date will often provide the best evidence of the value of the investment in that company. As a result, the methodologies discussed in this section involve estimating the value of the company as a whole as an initial step for valuing the companys privately issued securities. The manager will then need to determine how the total enterprise value is distributed among the various securities of the company. Managers of funds are encouraged, but not required, to contact other sophisticated investors in common companies to discuss valuation of common investments. However, managers are not required to use other investors valuations. A number of valuation methodologies are used in practice to determine fair value of a company. The manager should generally consider more than one method in determining fair value, or should corroborate the results of different methods. As appropriate, managers are encouraged to place more weight on valuation methodologies that are more objective, such as using cost or latest round of financing to value an investment, versus those that are more subjective, such as assessing the effect of a change of general market conditions on an investment's valuation.

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16.

The following methodologies are recommended as the primary methodologies for performing valuations of equity securities in private companies, generally in this order: Cost / Latest Round of Financing Comparable Company Transactions Performance Multiple

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In addition to methodologies discussed above, there may be other valid secondary methodologies, some of which are discussed in paragraph 35. These other methodologies may be appropriate in certain circumstances, and include discounting cash flows, valuing net assets, and industry-specific benchmarking. Other valuation matters, including valuing interest bearing securities, warrants, convertible securities, liquidation references, PIK dividends, and other rights, privileges and preferences of preferred securities are discussed in paragraph 41. Determination of valuation adjustments should typically be based upon actual positive and negative events, not upon expected accomplishments and performance.

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Cost / Latest Round of Financing 20. These Guidelines presume the manager at the time of the initial investment has considered near term company performance in determining investment valuation. Therefore, cost may represent fair value for some period of time. A valuation adjustment should be made in connection with the most recent material equity financing that includes one or more sophisticated and unrelated new investors, regardless of the managers participation. A subsequent equity financing that includes substantially the same group of investors as the prior financing should only be the basis for a change in valuation of prior investments if it can be objectively demonstrated that the financing was done at fair value (i.e. the same amount that would have occurred between unrelated willing parties). The validity of a valuation determined in accordance with paragraphs 20-22 is invariably diminished over time as a result of changing market conditions and company performance. As a result, such valuation is likely to be appropriate only for a reasonable period of time. Such period of time could vary depending on the nature and performance of the company or the occurrence of material changes in the companys operating environment. If a private financing will be completed with a high degree of certainty in the near future, and the pricing of the transaction has been substantially agreed, the value of a previous investment should be adjusted to the managers best estimate of the upcoming new valuation if it can be objectively determined that the prospective financing will be done at fair value.

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25.

If a round of financing includes a significant investment from a strategic investor paying a premium due to benefits accruing uniquely to themselves, the manager should reduce the companys valuation by an estimate of such premium. For companies that have not achieved positive maintainable EBITDA, valuations should generally be based on comparable company transactions (if available) to determine fair value. To the extent fair value estimates cannot be reasonably determined using the comparable company methodology, the subjective value determinations described in paragraph 36 should be applied. As a company achieves positive maintainable EBITDA, valuations should generally be based on the performance multiple methodology to determine fair value.

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Comparable Company Transactions 28. This methodology involves deriving the value of a company through examination of third-party investments in comparable equity securities of the company, examination of transactions in equity securities of comparable companies and direct comparisons to similar companies. These comparisons should be appropriately adjusted for any control premiums, synergistic benefits or other excess benefits or detriments that accrue to the owner when determining a proper comparable valuation. These Guidelines acknowledge that even if comparable transaction data can be found, until product or service feasibility is achieved, it is unlikely that truly comparable companies with readily determinable fair values will be readily identifiable. To the extent comparable transactions cannot be ascertained and fair value cannot be reasonably assessed and reliably measured using comparable transactions, the subjective value determinations described in paragraph 36 should be applied.

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Performance Multiple 30. The performance multiple methodology applies a relevant multiple to the performance of the company being valued in order to derive the value of the company. This approach is most applicable to companies that have achieved positive maintainable EBITDA. The valuation determined using this methodology is calculated by applying the most appropriate and reasonable multiple derived from reference to market based conditions of quoted companies or recent private transactions. The multiple to be used, which may need to be adjusted for differences in terms of growth prospects and risk attributes (depending on the size of the comparison sample), should be one of the following: a) Current average comparable public company multiple (appropriately discounted) for similar companies in the industry;

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b) Current average multiples for recent private transactions of similar companies in the industry; and c) The original acquisition multiple when no other similar public or private multiples can be ascertained. The most appropriate and reasonable multiple as determined above will be applied to the relevant operating performance metrics of the company to generate fair value. 32. The manager must be confident that the historic operating performance metrics of the company can be considered maintainable and relevant. In certain cases where the performance information is highly reliable, the combination of actual performance with short term forecast performance (not to exceed three months) is acceptable. The manager should be confident that reasonable, relevant and maintainable performance metrics are utilized, which may necessitate the adjustment for one-time and non-recurring items. In certain instances significant changes in the financial, regulatory, economic or legal climate in which the company operates which harm or enhance the prospects of the company, but may not yet have affected performance, need to be considered by the manager in evaluating maintainable performance. Managers should share with the Valuation Policy Committee the factual data and subjective assumptions that support the maintainable performance used in the valuation determination. The multiples used should be those that are used regularly and routinely to value companies in the industry in which the subject company is operating. If the multiples used are derived from public company comparables, the application of a discount to a private companys equity value should be on a basis similar to that used for a public security as outlined in paragraph 40. Managers should share with the Valuation Policy Committee the factual data that generates the multiples used in the valuation process.

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Other Valuation Methodologies 35. A few other valuation methodologies, which may be appropriate in certain circumstances, are as follows: a) Because of the need to use significant estimates and forward-looking information, discounted cash flow (DCF) methodologies should only be used in limited situations using a discount rate commensurate with the risks involved. These situations would involve instances where the methodologies discussed in these Guidelines prove incapable of addressing the specific circumstances. b) Net asset valuation methodologies should be used for valuing investments in businesses whose value is derived primarily from the underlying value of their tangible assets rather than their performance.

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c) Industry-specific benchmarks, which are customarily and routinely used in specific industries such as multiples of revenue, price per subscriber, or other industry norms, should only be used in estimating fair value where appropriate. Subjective Value Determinations 36. To the extent fair value estimates cannot be reasonably determined on a reliable basis in accordance with paragraphs 13-35, the manager will be required to perform the following: a) Assess changes in circumstances that may lead to adjustments to the carrying value of the investment. Examples of changes in circumstances which may exist include, but are not limited, to the following: i) The current performance of the company is significantly above or below the expectations at the time of the original investment. Potential indicators of this situation will include evaluation of the companys success or failure in attaining certain milestones, achieving technology breakthroughs, developing proprietary technology, progressing through clinical trials or significantly exceeding or failing to meet budgets. Market, economic and other company specific conditions have significantly improved or deteriorated since the time of the original investment. Potential indicators of this situation will include evaluation of broad changes in the economic climate, changes in the financing markets, changes in the legal or regulatory environment in which the company operates, changes in the companys cost structure, increased or decreased risk factors faced by the company, or significant fluctuations in share prices of quoted companies operating in the same or a related industry. Substantial decreases in the value of quoted, more senior securities of the company (i.e., public debt), defaults on any obligations of the company, a bankruptcy filing, significant ownership dilution caused by recapitalization of the company, or liquidity concerns that are expected to be more than short term in nature are circumstances which may indicate a potential impairment in value.

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b) Estimating the extent of a valuation adjustment will generally involve a great deal of subjectivity and will not easily lend itself to an analytical process. As a result, the manager will be required to exercise judgment and carefully consider the broad indicators of potential changes to the carrying value of the investment (such as market conditions, relevant stock market indices, and other factors as discussed above).

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III. 37.

VALUATION OF PUBLIC SECURITIES Public equity and public debt securities are required to be valued at the closing price or bid price each time financial statements are prepared in accordance with GAAP, except as discussed below. GAAP holds that discount (blockage) factors for unrestricted public securities are prohibited. As a result, no marketability discount should be taken on unrestricted public securities. However, pending finalization of the Financial Accounting Standards Board (FASB) fair value measurement project, the grandfather provisions of the Investment Companies Audit and Accounting Guide should remain in affect for all entities whose accounting policy was to apply blockage discounts before May 31, 2000. Should FASB allow discounts on thinly traded securities; the Guidelines would encourage managers to apply an appropriate marketability discount. A marketability discount should be taken on publicly traded securities when there is a formal restriction that limits sale. A recommended range of the discount for restricted equity securities from market price is 0% to 30%. When applying a discount to publicly traded restricted securities, factors that should be taken into consideration include the companys trading characteristics (the extent to which the market for the security is liquid or thinly traded), the investors ability to sell its position when the restriction expires, the magnitude of the investors position (the extent to which orderly liquidation of the security would take a significant time to complete, or would otherwise reduce the sales price), and other company factors such as its age, size, and industry presence. OTHER VALUATION MATTERS There are a wide variety of securities and capital structures used in the private equity industry. Those securities should be valued consistent with the Guidelines set forth above. Examples and guidelines for other securities and structures when there are no public markets are as follows: a) The carrying value of private interest bearing securities should be based on the underlying companys ability to service and repay debt. b) Valuations of securities denominated in currencies other than the base currency of the fund should be adjusted for changes in the spot prices of the currency. c) Warrants should be carried at their fair value.

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d) Convertible securities should be valued at the excess of the value of the underlying security over the conversion price as if the security was converted when the conversion feature is in the money. If the value of the underlying security is less than the conversion price, the carrying value of the convertible security should be based on the underlying companys ability to service and repay the security. e) Liquidation preferences are often granted to investors as an inducement to invest in a company. When a managers past experience indicates that liquidations preferences will be renegotiated or will not be fully enforced at the time of liquidation, the manager is strongly encouraged to use the expected results in determining the valuation of a security which has a liquidation preference. Allocation of the determined fair value of a company to the different classes of stock requires an understanding of preferred stockholder rights, namely the liquidation preferences. Once the enterprise value of the company is determined in accordance with these Guidelines, the allocation to preferred stock should be based upon the greater of the preferred stocks estimated liquidation preference or the preferred stocks conversion value. For example, convertible preferred stock that is underwater (conversion to common yields a lower value than exercising the liquidation preference) as of the valuation date is assigned a value equal to its estimated liquidation preference. However, convertible preferred stock that is in the money (conversion to common yields a higher value than exercising the liquidation preference) is treated as if converted to common stock. Common stock will be assigned a value equal to the pro rata share in the residual amount that remains after consideration of the liquidation preference of underwater preferred stock. Based on the managers judgment, liquidation preferences granted to investors in a subsequent financing round may reduce the value of preceding rounds, depending on the magnitude and other terms of the new preferences granted. f) The accrual of PIK dividends is recommended as long as the health of the company and the underlying securities is not in question. g) Escrows from the sale of a portfolio company should be valued at an amount that the manager, using its best estimate, ultimately expects to receive from the buyer in light of the escrows various conditions. h) Secondary purchase and sale transactions of partnership interests in and of themselves should not be considered in portfolio company valuations or positions in funds. This is a result of sellers often being in distressed situations and the fact that there are very few willing buyers and willing sellers. i) Managers should take into consideration the characteristics of preferred securities and their unique rights, privileges and preferences and should value those securities not previously discussed in these Guidelines in accordance with the spirit of these Guidelines and market conditions. August 2003

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V. 42.

CONCLUSION As the private equity industry has matured in the United States, there is a need for greater consistency of valuation standards/methodologies by both managers of, and investors in, private equity funds. These Guidelines were designed to provide a framework for addressing the majority of the private equity industrys valuation questions on a consistent and transparent basis. It is recommended that managers and investors collaborate to share experiences and best practices across relationships. This collaboration will narrow the range of specific definitions of subjective terms and will enhance the consistent application of these Guidelines. The key goals of these Guidelines are as follows: Encourage managers to approach valuation from a consistent, transparent and prudent basis. Focus the private equity industry on the need to determine fair value consistent with these Guidelines, for each of their investments. Provide greater transparency into valuation results through the use of the Valuation Policy Committee as described in the Guidelines.

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The Guidelines are not intended to be all encompassing, nor are they intended to eliminate all subjectivity. Rather, they are to be a guide to assist managers and investors in agreeing to a valuation framework while allowing a manager to exercise its best judgment in applying the Guidelines. The Private Equity Industry Guidelines Group acknowledges that the application of these guidelines may result in a departure from past valuation practices. Although early adoption of these Guidelines is encouraged, it is recommended that managers and investors work jointly to develop a timetable for their use. It is expected that over time the broad use of these Guidelines will become industry practice.

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Page 12 APPENDIX I - BACKGROUND

Background on the Private Equity Industry Guidelines Group (PEIGG) The Private Equity Industry Guidelines Group (PEIGG) was formed in February 2002, and is comprised of a volunteer group of industry-wide representatives who have come together to debate and establish a set of reporting guidelines for the industry. Its mission is to promote increased reporting consistency and transparency while at the same time improving operating efficiency in the transfer of information among market participants by establishing a set of standard Guidelines for the content, formatting and delivery of information. The Group is believed to be the first broad-based alliance, comprised of general partners, limited partners and service providers participating in both the venture and buyout segments of the private equity industry in the U.S. and overseas. The Group has created subcommittees to address key issues in private equity reporting, including valuation, underlying portfolio company reporting, performance reporting, and financial reporting.

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Page 13 APPENDIX II PEIGG MEMBERS PEIGG BOARD Name Nick Archer Nicole Arnaboldi Marie N. Berggren* Paula Chester J. Paul de Klerk Kevin S. Delbridge* Real Desrochers William B. Franklin Jamie Gates Mario L. Giannini Stephen Holmes* James Hutter Lawrence S. Rusoff Jose Sinai Carl Thoma Eugene Trainor III Howard Weiss Kenneth C. Whitney* CONTRIBUTORS Joseph Croasdale Seth Hall Peter McMillan Lee Mitchell Edward S. Mollahan ADVISORS Keats Aiken Angela Dailey Daniel P. Finkelman James Griffin* David L. Larsen* Allen Waldrop Michael Wolitzer Director President Partner Director Partner Director Partner KPMG LLP DAI Communications Group Testa Hurwitz & Thibeault KPMG LLP KPMG LLP KPMG LLP Simpson Thacher & Bartlett LLP Vice President Investment Officer II Principal Partner Senior VP, Investor Services J.P. Morgan Partners, LLC California State Teachers' Retirement System Texas Pacific Group Thoma Cressey Equity Partners J.P. Morgan Chase & Co. Title Director of Fund Admin. Managing Director Managing Director Alternative Investments Director, PE Investments Managing Partner, CFO & COO Managing Director Director Alternative Investments Managing Director Partner Chief Executive Officer General Partner and CFO Chief Financial Officer Portfolio Manager CEO & President Managing Partner Admin. General Partner/COO Chief Financial Officer Sr. Managing Director Affiliation CVC Capital Partners Limited Credit Suisse First Boston University of California Office of the Treasurer of the Regents Formerly NY State Common Ret. System NIB Capital Private Equity N.V. HarbourVest Partners, LLC California State Teachers' Retirement System Bank of America Capital Corporation Texas Pacific Group Hamilton Lane Advisors, Inc. InterWest Partners J.P. Morgan Partners, LLC General Motors Investment Mgmt. Corp. Financial Technologies, Inc. Thoma Cressey Equity Partners New Enterprise Associates Castle Harlan, Inc. The Blackstone Group

* Represents members/advisors of the valuation subcommittee of the PEIGG. August 2003