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Our Second Quarter 2018 Update

Optivest Investment Banking

Paul Donnelly, Senior Managing Director;
Stevan Grubic, Principal

Optivest Wealth Management

Mark Van Mourick, Founding Partner;
Leslie Calhoun, Senior Partner;
Bart Zandbergen, Senior Partner; and
Stella Choi, CFP/CFA Dir. Portfolio Management

April 2018

Company Valuations by Paul

How the recent tax cuts impact business valuation

There are several variables to consider when trying to value a business. The many moving parts, all of which can affect value positively or negatively, are hard to keep up with. Revenue, debt, assets, and, yes, even tax rates, can all influence a company’s value.

So what impact will the recent tax cuts have on business valuation? In order to answer that, we have to know what role tax rates play in valuing a company, which can differ depending on how the business is set up (i.e., S-Corp, C-Corp, etc.).

The basic difference between S-Corps and C-Corps is how they are taxed. C-Corps pay taxes at the business level and pay the corporate tax rate, now 21 percent. S-Corps, like LLCs and partnerships, are pass-through entities. This means all profits pass through to the business owners and taxes are paid at the personal income tax rate, which historically was much lower than the corporate rate.

Net operating profits, which are all earnings after taxes and all other expenses, are a major factor in business valuation. One way a business is valued is based on a multiple of its net profits. It is with this style of valuation that a lower tax rate will have the greatest benefit.

The Tax Cuts and Jobs Act
For the most part, the 2017 Tax Cuts and Jobs Act will have a positive impact on business valuation because it decreases the amount of taxes that are paid and thus increases the net operating profits. While it might seem obvious that fewer taxes means greater cash flow, lower taxes can have negative impacts as well.

Here are three ways the 2017 Tax Cuts and Jobs Act can impact business valuation:

Increased cash flow

Cash flow is a great way of determining the overall health of a business. Some businesses can survive on extremely thin profit margins simply because they have excellent cash flow. On the other hand, businesses that struggle with cash flow will need much higher profit margins to succeed. A lower tax rate frees up cash and increased future cash flows have a direct impact on valuation.

Accelerated depreciation

Another important change under the Tax Cuts and Jobs Act was the addition of accelerated depreciation. Businesses can now deduct from their taxes the total cost – up to $1 million – of qualified property, plant, and equipment (PP&E) purchases made between September 2017 and December 2022.

Cost of debt

One downside to a lower corporate tax rate is the cost of carrying debt. Cost of debt is the amount of interest a company pays on its debt. These interest expenses are tax deductible and help to lower the overall effective tax rate.

In short, lower taxes means more cash flow and more cash flow typically results in higher values.

If you have additional questions on how the new tax laws impact the valuation of your business, you may contact me at

U.S. & World Economy by Mark

All Weather Portfolios

In our January newsletter we forecasted that interest rates would rise enough to cause the long-term bond market to lose 5%, which would cause the stock market to drop 10+%. That is exactly what happened in February and March. At some point toward the end of an economic business cycle, “good news” for the economy turns into “bad news” for the markets as the Fed raises interest rates to “cool” expansion; the yield curve flattens, the economy takes a dip, and then we start a new cycle.

Timing this has proved unrewarding in the face of steep odds, favoring an upward biased stock market. According to Check Capital, since WWII the stock market has been up 78% of years (roughly 4 out of 5 years), 95% of all rolling 5-year periods and 100% of each decade. We de-risked our portfolios in January and remain confident that our balanced “all weather” portfolios with direct real estate and alternatives will smooth out these peaks and valleys.

The new tax law has opened the door to some favorable estate freezing and capital basis shifting strategies. I am available to discuss with you and your tax attorney to see if you could benefit you as well.

Asset Allocation by Leslie

The first quarter of 2018 brought the return of volatility and the first stock market correction since oil prices collapsed in 2015. Interest rate hikes are partly to blame but so are talks of tariffs and nationalization, inflation and the actual consequences (or lack thereof) of tax reform. We close out the first quarter of 2018 with the S&P giving back 1.2%, the third consecutive quarterly gain for bond yields which translates to falling bond prices, and a weakening U.S. Dollar.

But corrections are both normal and healthy, particularly during extended bull markets. However, a flattening yield curve is not healthy. There has been a rising supply of short-term debt being sold at the same time the Fed is raising interest rates and that is leading to a flattening, a smaller gap between 2-year and 10-year yields. We have to remember that the Fed is no longer the largest buyer of U.S. debt since the end of their multiple QEs (Quantitative Easing). The number of rate hikes the Fed will make in 2018 is a subject of constant debate and is not solidly predictable since so many aspects of economic expansion, stall or contraction are taken into consideration.

In light of the increased volatility, global trade tension and rising rates, we have searched for opportunities that should outperform in a period of small or negative performance in stock markets and rising rates. Think disruptive technology, long-short and multi-strategy alternative funds, and real estate investments that can modify rents daily or over very short periods of time. We continue to search for niche ways to serve our sophisticated clientele. We look forward to discussing the hedge fund and real opportunities with you when suitable.

Portfolio Management by Stella

Our model illustrated below includes liquid REITs and Vida Longevity Fund but does not include direct investment real estate or other hedge funds in our portfolios. Overall the strategy was slightly negative where Real Asset was the most affected by the rate increase, the benign inflation data, and increased equity volatility. Alternative strategy was slightly negative. In spite of the equity volatility, our Global Equity bounded back to have positive returns for the quarter. Global Fixed Income was slightly positive.

Global Fixed Incomes

The best performing region in Global Equities was Emerging Market. U.S. Equity was mixed where the market still favored the growth sector such as technology. Real Assets categories are a turning story where trailing 1-year returns were decently positive, but the first quarter return is the most negative return due to an increase in Treasury rates and a lower than expected inflation number. We lowered exposure to Real Assets in the beginning of our tactical model rebalance (early Q1) however, we plan to keep Real Assets within the model. We will be making some security changes primarily for clients who do not have access to direct real estate investments.

Once again, the best performing Fixed Income asset was Emerging Market Debt in local currency. High quality Corporate Bond was the most negatively affected by the yield increase. In Alternative categories, the Managed Futures return was consistently negative. This is the area that should have done well since it is the least similar to the equity market. We have decided to eliminate this from our portfolios and we are using proceeds to add different Alternative styles and have added more weight to Fixed Income and Real Asset categories.

While we are awaiting final figures for some of our illiquid investments, we can already determine that our diversified portfolios outperformed the popular 60% equity and 40% fixed income which was -1.04% for the first quarter.

Global Fixed Incomes

Global Fixed Incomes

Financial & Business Planning by Bart

Time – Not Timing – Is What Matters

With the recent market volatility, I thought it beneficial to look at some facts and history to put things into perspective… Studies show that people place too much emphasis on recent events and disregard long-term realities. Even amidst the recent market downturn, remember that stocks have rewarded investors over time. For example: Even including downturns, the S&P 500’s mean return over all rolling 10-year periods from 1927 to 2015 was 10.46%.

Keep in mind that a long-term perspective can help you prevail through challenging times. Fear of loss is a common emotion among investors, driving many to buy and sell investments at the wrong time. In general, people get emotional about money—especially the possibility of losing it. According to Nobel Prize Winning Psychologist Daniel Kahneman, for most people, the fear of losing $100 is more intense than the prospect of gaining $150.

Risk aversion can have its cost, and it’s not just the missed opportunity. Too often, emotion sparks irrational behavior such as cashing out, chasing returns and jumping from fund to fund – essentially buying high and selling low – which translates to locking in losses. A recent study by Dalbar, Inc., showed that the average equity investor returns lag those of the S&P 500 by 3.66% due to emotional buying and selling.

We do not recommend jumping in and out of the Market. Successful market timing is very difficult because it requires getting out at the right time and getting back in at the right time. Let’s also not forget history. The following statistics help with this point:

$10,000 invested in S&P 500

On average, you should expect the market to experience a 5% correction at least 3 times per year. (Although, in recent years we have not seen this constantly occur.)

The bottom line is this: Time – not timing – is what matters. It’s time in the market, not timing the market, that matters the most.

I’ll leave you with one of my favorite Warren Buffet Quotes: “The market is the most efficient mechanism in the world for transferring wealth from impatient people to patient people.”

As always, we thank you for the trust and confidence you have placed in the team at Optivest Wealth Management.


As we enter this period of heightened volatility and checkered quarterly returns, it is even more important to keep a strategically balanced portfolio. We remain opportunistic in adding non-correlated allocations (see Leslie’s thoughts) and stick to our unemotional disciplines (see Bart’s advice) to avoid common market timing whipsaw mistakes, all the while continuously optimizing our core securities selection (per Stella’s article).