10 April 2017
When Damodaran came to town
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Valuation has been a seemingly challenging topic to stakeholders in the investment world. Whereas some practitioners and academics view the subject as a science, others view it as an art. Aswath Damodaran, professor of finance at the Stern School of Business, New York University, visited Lagos recently to anchor a corporate finance and valuation master class organised by Coronation Capital. 

In this piece, Innocent Unah, Senior Analyst at BusinessDay Media, takes you on an excursion to explore the import of the don’s visit, as well as other matters relating to the subject.

To academics, students, and practitioners in the field of corporate finance, Aswath Damodaran, a professor of Finance at the Stern School of Business (Stern), New York University (NYU), is a guru, respected for his thought-provoking views that continually spark creative disruption in corporate finance and valuation.

Damodaran has received the David Margolis Teaching Excellence Fellowship, and the Richard L. Rosenthal Award for Innovation in Investment Management and Corporate Finance; his skill and enthusiasm in the classroom has earned him the Schools of Business Excellence in Teaching Award in 1988, and the Distinguished Teaching award from NYU in 1990.

“This guy is the legend of valuation and corporate finance. You should definitely take his class if you get the chance. Easily the best class I’ve taken at Stern so far. Not only is he the smartest dude on this subject, but he’s a ridiculously good teacher.”

The above are some of the many praises mouthed by the past students of the multiple award-winning and multi-skilled professor. He has been voted “Professor of the Year” by the graduating M.B.A. class five times during his career at NYU.

Nigerians in the investment management and corporate finance sectors are equally in awe of the globally revered professor, and often wondered whether they will ever have the opportunity to be tutored by the ebullient one; therefore, they were excited to learn that their dreams would crystallise – Damodaran is coming to town!

Olufemi Akinsanya who chairs the board of Lagos-based investment firm, First Ally Capital, said that the management of Coronation Capital, who facilitated the professor’s advent, saved the industry so much cost. According to him, the alternative to Damodaran coming to Lagos would have been to fly all the participants to New York, the teaching base of the Professor, at a huge cost.

The newspapers carried the news that Aswath Damodaran was coming to Lagos. Given the high profile of the don, you must be thinking that only an equally high-profiled party could bring him to Nigeria, to Lagos. And you are right.

“Conceptually, I think the ability of Coronation Capital to bring Damodaran was a wonderful coup,” Akinsanya told BusinessDay in a telephone chat.

But what does Damodaran’s visit to Nigeria mean?

“Valuation is at the soul of what I do,” said Aknisanya. “Damodaran is on top of what he does as he understands the subject thoroughly; his content is top class; he is not just a finance theorist – he is also a practitioner.”

Aknisanya added that the master class was aptly christened as it helped Nigerian practitioners to hone their skills through comprehensive grasp of modern concepts in valuation.

In a period when security concerns about Nigeria are unjustifiably rife, there is no gainsaying that getting a top US citizen to come to Nigeria and return safely to his highly security-conscious country would do great deal of repair to the country’s battered image.

“Now that you have come, now that you have seen, can you go back and tell them that Nigeria is safe?” Sade Odunaiya, president, CFA society of Nigeria asked the professor.

“Let them know that instead of us to fly to Ghana to take the CFA exam, let them allow us to just do the exams in Nigeria. We are not sure of the perception they have of Nigeria.”

The Coronation Capital corporate finance and valuation master class, which the organisers disclosed will be a regular event, may just have won some image-repair gains for the country as the professor himself confessed that he was excited to have come to Nigeria, having had had a very ‘engaging and exciting’ class.

Furthermore, employers have often rued the dearth of knowledge, capacity, and skills in the finance and other sectors in Nigeria.

Charles Ogunwuyi who is the chief operating officer at Coronation Capital said that having Damodaran kick off the inaugural (finance and valuation) master class was a massive boost to the firm’s drive to increase stakeholders’ knowledge and capacity in Nigeria’s private equity ecosystem.

“We are not just interested in building capacity for our investee companies alone. We are also interested in other stakeholders within the ecosystem, including policy makers, C-level executives of companies, and senior management of our sister and investee companies.”

To private equity practitioners, knowing the value of investee firms is critical to the decisions they make on the price to pay for any stake in the firm. According to Damodaran, valuing an asset is not the same as pricing that asset; you should act on something you value.

But the question kept popping up: is valuation an art or a science? Practitioners who attended the event were divided along both schools of thought. But Damodaran belongs to neither.

Characteristically, the erudite professor dazed many a finance practitioner during the master class as he disclosed that valuation is neither an art nor a science.

“In a science, if you get the inputs right, you should get the output right. The laws of physics and mathematics are universal and there are no exceptions.” So, the wise one pooh-poohed the notion that valuation is a science.

There are many elements that can be taught in art, but there is also a magic that you either have or you do not. The essence of an art is that you are either a great artist or you are not. On this note, the sage says that valuation is not an art. So, what then is valuation?

Coronation Capital and participants admitted they had used valuation to make investment decisions. They continue to use it, in addition to other tools and parameters, to guide their investments in companies operating in their focus sectors: financial services, upstream oil and gas, real estate, and financial technology.

“Valuation is a craft,” said Damodaran. “A craft is a skill that you learn by doing. The more you do it, the better you get at it.”

Damodaran noted that the past is not always a good indicator of the future as it is noisy and may blur the perception for profitable investments, a reason Coronation Capital and other private equity investors should not emphasise past earnings of potential investee companies as a basis for making their investment decisions.

The Management of Coronation Capital said that rather than focus on the past performance of prospective investee companies, they concentrate on being able to turn around businesses they believe have the potential for long-term growth.

Ogunwuyi said, “Coronation Capital is a patient investor that seeks to set up the right kind of structure, the right talent, the right strategy, and help build the proper execution mind-set and organisational culture that we pride ourselves.”

He added that the private equity firm infuses a high performance culture into its investee companies, stressing that it is this type of culture that has enabled African businesses like Access Bank transform into Regional Champions in just 15 years.

“That’s the kind of ‘X’ factor that we inject into businesses that we are part of,” Ogunwuyi said.

Coronation Capital is a private equity (PE) firm that takes a long-term view (beyond 7 years) to the transformation journey of its investee companies, unlike the traditional PE firms that operate in 7-year cycles in developed economies where they are not faced with the operational challenges and structural issues typically found in African markets.

“A lot of people came in and thought they were just going to get the tools, but learnt that valuation was just a craft, neither an art nor a science,” said one of the participants at the Master Class. “That is the high quality that Coronation Capital is bringing to the knowledge and capacity building in the investment ecosystem.”

Ade Bajomo, executive director, market operations and technology at The Nigerian Stock Exchange, said that the insight dished by one of the world’s corporate finance ‘rock stars’ at the master class could equip our people with the rights skills to be active in thought leadership in the field of finance and investment.

Innocent Unah, BusinessDay