EFTA01079016.pdf

CONFIDENTIAL Valuation Analysis of Rockefeller Financial Services, Inc. as of December 31, 2015 Berkshire Capital EFTA01079016 Rockefeller Financial Services, Inc. Table of Contents TAB SECTION PAGE I Valuation Letter 1 II Market & Industry Overview 4 III Valuation Methodologies 12 IV Valuation Model Berkshire Capital CONFIDENTIAL EFTA01079017 Rockefeller Financial Services, Inc. Valuation Letter Pursuant to an engagement letter dated October 9, 2015 between Rockefeller Financial Services, Inc. (the "Company" or "RFS") and Berkshire Capital Securities LLC ("Berkshire Capital"), Berkshire Capital has prepared a valuation of the Company with its consolidated subsidiaries (the "Valuation") as of December 31, 2015 (the "Reference Date"). We understand that the Valuation will be used by the Company to establish a value for both the Class A (Voting) and the Class B (Non-Voting) shares of RFS as of the Reference Date. The Valuation was completed in a manner consistent with the requirements of: (i) the Shareholders' Agreement, by and among RFS, the Family Trust established under Indenture dated December 21, 1979 (the "Family Trust") and the Shareholders named therein, dated as of February 1, 1991 as amended and supplemented to date; (ii) the Stockholders Agreement dated as of May 29, 2012 and effective as of September 28, 2012 among RFS, the Family Trust and RIT Capital Partners plc ("RIT"); and (iii) the Resolution adopted by the RFS Compensation Committee on January 8, 2009 on fair market methodology. The valuation standard is nonmarketable minority interest, where the analysis presumes the continued operation of the business as a going concern without a sale of the assets or businesses of the Company. Berkshire Capital is a private investment bank that focuses exclusively on providing financial advisory services to the investment management and securities industries. Berkshire Capital, as a customary part of its investment banking business, is regularly engaged in the valuation of financial services companies in connection with mergers and acquisitions, and valuations for estate, corporate and other purposes. Since inception in 1983, Berkshire Capital has acted as financial advisor in over 310 transactions with an aggregate value exceeding $10 billion. Over this period, Berkshire Capital has rendered over 275 valuations, strategic reviews and fairness opinions for publicly traded and privately owned financial services firms. For purposes of the estimate of value set forth herein, we have: (i) reviewed certain audited financial statements, unaudited financial statements, organizational documents and other financial and operating data provided by the management of the Company; (ii) discussed the businesses, financial condition, recent results of operations and the prospects of the Company with senior management; (iii) compared certain financial information for the Company with similar information for certain other companies the securities of which are publicly traded; (iv) reviewed the financial terms, to the extent publicly available or otherwise available to Berkshire Capital due to its role as financial advisor to one of the parties to the transaction, of certain mergers and acquisitions of companies which we deemed to be relevant to the Valuation of the Company; and (v) performed such other analyses and considered such other information as we deemed appropriate. We have assumed and relied upon, without independent verification, the accuracy and completeness of all of the information reviewed by us for purposes of this Valuation, and we have assumed no responsibility for and did not conduct any independent verification of the information. In that regard, we have assumed that the information relating to the prospects of the Company were reasonably prepared on a basis reflecting the best currently available judgments and estimates of senior management. Berkshire Capital Page 1 EFTA01079018 Rockefeller Financial Services, Inc. Valuation Letter In connection with the preparation of this Valuation, we performed a variety of financial analyses. Our Valuation conclusions are based upon various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances. In performing our analyses, we made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of the Company. The analyses performed by us are not necessarily indicative of future values or future results that might be achieved, all of which may be more or less favorable than that suggested by such analyses, and such analyses and estimates are inherently subject to substantial uncertainty. With respect to the analysis of guideline publicly traded companies and the analysis of guideline acquisitions, an evaluation of the results of those analyses is not entirely mathematical. Accordingly, an analysis of guideline publicly traded companies and guideline acquisitions necessarily involves complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the public trading values or announced transaction values, as the case may be, of the companies being analyzed. Our estimate of value is based on all relevant financial information, operating data and market, economic and other conditions as of the Reference Date that was available to us as of the date hereof. Events occurring after the Reference Date could materially affect the assumptions and conclusions contained in this Valuation. Neither Berkshire Capital nor the individuals involved in the preparation of this Valuation on behalf of Berkshire Capital have any present or contemplated future interest in the Company. This Valuation has been prepared solely for the internal use of the Company and is not intended for dissemination to, and may not be relied upon by, persons other than the senior management of the Company. Neither the contents of this report, nor its conclusions, may be disclosed, referred or communicated in whole or in part to any third party for any purpose whatsoever except with our written consent in each instance. In furnishing this report, we do not admit that we are experts on the securities laws of any foreign or domestic jurisdiction. Berkshire Capital Page 2 EFTA01079019 Rockefeller Financial Services, Inc. Valuation Letter Based on the foregoing, and the other matters discussed in greater detail in this report, we are of the opinion that, as of the Reference Date, the value of the Company on a non-marketable minority interest basis is $188.9 million. Very truly yours, Berkshire Capital Securities LLC By: R. Bruce Cameron President January 23, 2016 Berkshire Capital Page 3 EFTA01079020 Rockefeller Financial Services, Inc. Market & Industry Overview Throughout 2015, the market generally has continued the broad-based rally that started in the summer of 2011, with a brief decline between August and October. As of the end of December 2015, the market has gained 202.1% since its 2009 low. Year over year, the market was relatively flat, with the market falling 0.7% from the end of December 2014 to the end of December 2015. S&P 500 Index 60% Fannie Mae, Freddie Mac Conservatorships Lehman Bankruptcy, Merrill Sale 40% WaMu Failure First AIG Bailout Bear Stearns/ Credit Markets Seize JP Morgan TARP Enacted 20% Citigroup Loss Sharing Deal 0% -20% -40% -60% 045 01 01 OS 01, 101v09 0 9 v10.1 0 vec,10 1% oec1% 11- Oec;1.1 1-5 l e• OytAa Oec.1$ Vec 'Dec \O°. Oec: )O<%- Oe°' 1%>('" Berkshire Capital Page 4 EFTA01079021 Rockefeller Financial Services, Inc. Market & Industry Overview In 2015, market performance in AUM, revenue and pre-tax income growth varied for each participant, and, while some investment management firms experienced strong growth, others encountered steep declines in 2015. Trends in AUM, Revenues & Pre-Tax Income, 2Q14 - 2Q15 Growth Rates, 2Q14 - 2Q15 Pre-Tax Firm AUM Revenues Income Affiliated Managers Group, Inc. 5.9% 6.8% 12.0% BlackRock, Inc. 2.8% 3.9% 5.0% Calamos Asset Management Inc. -5.1% -14.1% -48.0% Cohen & Steers, Inc. -4.1% 3.2% -4.1% Diamond Hill Investment Group 17.8% 24.3% 50.8% Eaton Vance Corp. 8.8% 2.3% 6.1% Federated Investors, Inc. -0.6% 2.2% 3.5% Franklin Resources, Inc. -5.9% -0.5% 2.0% GAMCO Investors, Inc. -8.0% -8.5% -18.9% Invesco Ltd. 0.1% 0.9% 0.4% Janus Capital Group Inc. 8.3% 13.2% 17.4% Legg Mason, Inc. -0.7% 2.0% 3.1% Manning & Napier, Inc. -20.3% -4.8% 84.1% Pzena Investment Management, Inc. 3.7% 9.5% 1.3% T. Rowe Price Group, Inc. 4.7% 9.9% 8.3% Virtus Investment Partners, Inc. -14.6% -3.7% -18.6% Waddell & Reed Financial, Inc. -11.0% 3.9% -1.1% Westwood Holdings Group, Inc. 15.0% 17.3% 13.6% MEAN -0.2% 3.8% 6.5% MEDIAN -0.2% 2.8% 3.3% Source: SNL Database Berkshire Capital Page 5 EFTA01079022 Rockefeller Financial Services, Inc. Market & Industry Overview Median Publicly Traded Investment Management Multiples' 20.0x 18.0x 16.0x 14.8x 14.0x 12.9x 12.7x 12.0x 11.0x 10.2x 10.0x 9.3x 8.0x 6.0x 4.3x 3.8x 4.0x 3.2x 2.0x 0.0x Median Price-to-Current Fiscal Year Median Price-to-Forward Fiscal Year Median Price-to-Current Fiscal Year Pre-Tax Income Pre-Tax Income Revenues • December 2013 • December 2014 tv December 2015 I 2013 multiples include the following firms: APAM, BPFH, CLMS, CNS, DHIL, EV, GBONS, PZN, SAMG, VRTS, WDR and WHG. 2014 multiples include the following firms: APAM, BPFH, CLMS, CNS, DHIL, EV, GBL, JNS, PZN, SAMG, VRTS, WDR and WHG. 2015 multiples include APAM, BPFH, CLMS, CNS, OHIL, EV, GSL, INS, PZN, SAMG, VRTS, WDR and WHG. Berkshire Capital Page 6 EFTA01079023 Rockefeller Financial Services, Inc. Market & Industry Overview Earnings estimates have rebounded from their 2009 lows due to the sustained market rebound and an increasingly optimistic economic outlook. However, estimates remain volatile due to uncertainty around U.S. fiscal policy and the global economic recovery, with fourth quarter 2015 estimates decreasing in the face of this uncertainty. Forward EPS Estimates — T. Rowe Price Forward EPS Estimates — Franklin Resources $6.00 - $4.50 5.50 - 4.00 5.00 - 3.50 4.50 - 4.00 - 3.00 3.50 - 2.50 3.00 - 2.00 2.50 - 2.00 1.50 1.50 1.00 1.00 0.50 0.50 0.00 0.00 N 1-t. :15 Oe~1S 1. pe~O9 O PQt.1 1 cyte--/' Pr •O lot cm, c...9 6: pe~09 tx`) No pc1-\ ye( 11 "<- I XY (Ya tx‘M, ixol v ac' Source: SNL Database, Berkshire Capital research Berkshire Capital Page 7 EFTA01079024 Rockefeller Financial Services, Inc. Market & Industry Overview While investment manager five-year EPS growth expectations increased throughout the first three quarters of 2014, expectations have declined from the fourth quarter of 2014 and throughout 2015 due to increased uncertainty in the global economy. Five-Year Estimated EPS Growth Rates — Investment Managers 20% 18% 16% 14% 12% 10% 100114 8% 6% sil)Nov"):40Ned).S.2.0) G.1 1. /,:•S G.0 sPt %.5 S5 .S5 c:N•C" kl% o kik .0 se oe kika No se oe osc Or 40 cog% 02S- ov s oe Ranges defined by 25th and 75th percentile projected growth rates. Index includes AMG, APAM (as of 3/13), ART (3/11through 12/12), BEN, BLK, CLMS, CNS, EPHC (3/11 through 11/12), EV, FII, GBL, GROW (3/11through 4/12), IVZ, JNS, LM, MN (as of 6/12), OMAM (as of 10/14), PZN, SAMG (as of 9/13), TROW and WDR. Source: SNL Database, Berkshire Capital research Berkshire Capital Page 8 EFTA01079025 Rockefeller Financial Services, Inc. Market & Industry Overview After steadily rising since 2011, multiples began a steady decline in the second half of 2014 and into 2015, with investment managers currently trading at LTM pre-tax of 8.1x— 10.0x as of December 2015, compared to 10.2x— 12.3x one year ago. Price / LTM Pre-Tax Multiples — Investment Managers 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x 1 11 •ys. .‘"S. c, \,1, 1. x.1 1 c,*11. '3 0) et,"1.$ e.S% t < O -%.11e‘secAPIvac Sell tpc'15 SIsec ' v.e.•'15 :15 't oe v. oe sey Ranges defined by 25th and 75th percentile Price / LTM Pre-Tax Multiples. Index includes AMG, APAM (as of 3/13), ART (3/11 through 12/12), BEN, BLK, CLMS, CNS, EPHC (3/11 through 11/12), EV, File GBL, GROW (10/09 through 4/12), IVZ_INS, LM, MN (as of 6/12), OMAM (as of 10/14), PZN, SAMG (as of 9/13), TROW and WDR. Source: SNL Database, Berkshire Capital research Berkshire Capital Page 9 EFTA01079026 Rockefeller Financial Services, Inc. Market & Industry Overview When viewed on a forward-looking basis, relative valuations increased steadily throughout 2012 and 2013 but fell slightly in 2014 and continued to decline in 2015. At the end of December 2015, firms were valued at 7.5x — 10.2x forward fiscal year projected pre- tax income, compared to 9.7x — 12.4x one year ago. Price / Forward Fiscal Year Projected Pre-Tax Multiples — Investment Managers 20.0x 16.0x 12.0x 8.0x II Ilvi I woo II 4.0x 0.0x r1))- „11. e;11- „.1 1- e:O c% 4/ ^ AP% A S C1 f. S C1 4/ ( .S5 A SS ^N S c. SS ‘,10 \\Y - SeX ‘.40' \%)•- CAT 0e - kVb' S - O2/ ‘‘I• sex roe= tp: \a, -- sex vs= Ranges defined by 25th and 75th percentile Price / Forward Fiscal Year Pre-Tax multiples. Index includes AMG, APAM (as of 3/13), ART (3/11 through 12/12), BEN, BLK, CLMS, CNS, EPHC (3/11 through 11/12), EV, FII, GBL, GROW (10/09 through 4/12), IVZ, JNS, LM, MN (as of 6/12), OMAM (as of 10/14), PZN, SAMG (as of 9/13), TROW and WDR. Source: SNL Database, Berkshire Capital research Berkshire Capital Page 10 EFTA01079027 Rockefeller Financial Services, Inc. Market & Industry Overview Investment managers have experienced a decline in market performance in 2015. As of the end of December 2015, equity managers were down 19.2% relative to their December 2014 levels, while fixed income managers were down 10.4% over the same period. Banks, in comparison, were only down 1.6% relative to their December 2014 levels. Indexed Stock Price Performance 100% 75% - 50% 25% 0% -25% -50% ISS IN IN O. 1O.vIN 'O tit (,„ O- A1- A.1- SSS AS NS ND'A"' ND• seoscs.N NS -te N2pio NS yt • O -sec, O6-Oev NS NS .0e ce tt..9‘,P pc pe t p t so NV' ce 07.4 O6Oecov$84 oat Ovisi, —Equity Firms (BEN, JNS, TROW) Fixed Income Firms (BLK, EV, FII) —S&P 500 —KBW Bank Index Source: Bloomberg Berkshire Capital Page 11 EFTA01079028 Rockefeller Financial Services, Inc. Valuation Methodologies LEVELS OF VALUE In general, a security can be valued on one of three levels: control interest value; marketable minority interest value; or nonmarketable minority interest value! • A control interest value represents the value of the enterprise as a whole, as if the enterprise were sold to a hypothetical buyer. The control interest value can be derived directly from the valuation multiples paid for comparable companies in recent acquisition transactions or indirectly by applying control premiums paid in recent acquisitions of comparable publicly traded companies to the current valuation multiples of comparable companies the securities of which are currently publicly traded.; • A marketable minority interest value reflects quoted prices on a stock exchange or in the over-the-counter market. • The nonmarketable minority interest value of a privately held company reflects the value of a security for which there is no active market or other ability to convert readily into cash or cash equivalents. By definition, these interests lack indicia of control over the affairs of the subject company. Levels of Value 4 Relevant Market Data Control Value Guideline Acquisitions CONTINUUM OF VALUE Discount for Lack of Premiums Paid in Acquisitions of Public Control Premium Control Companies Freely Traded Minority Interest Value Guideline Publicly Traded Companies Restricted Stock Studies; Proprietary Marketability Discount Analysis Nonmarketable Minority Interest Value 2 Abrams, Jay B., Quantitative Business Valuation, McGraw-Hill, 2001. Hitchner, James R., Financial Valuation: Applications and Models, John Wiley & Sons, 2003. 4 Mercer, Z. Christopher, Quantifying Marketability Discounts, Peabody Publishing, 2001. Berkshire Capital Page 12 EFTA01079029 Rockefeller Financial Services, Inc. Valuation Methodologies VALUATION METHODOLOGIES Current valuation theory encompasses three distinct approaches: the income, market and asset-based (or cost) approaches to valuation.s4 • The income approach involves discounting projected cash flows and terminal value at an appropriate discount rate. • The market approach involves capitalizing earnings, revenues, cash flow or other measures at multiples drawn from current market valuations of publicly traded companies or recent acquisition transactions. • The asset-based approach involves marking to market tangible and intangible assets. Berkshire Capital's valuation model focuses on the income and market approaches and derives indicated values from (1) current market multiples for publicly traded investment management firms; (2) transaction multiples for recent acquisitions of investment management firms; and (3) a discounted cash flow analysis incorporating the current financial condition and prospects of the subject company. The asset-based approach is not considered to be relevant in most cases due to (i) the characteristics of the investment management industry and (ii) the fact that the asset-based approach is primarily used when valuing not-for-profit organizations, holding companies, manufacturing companies, asset-intensive companies, such as family limited partnerships, or companies in bankruptcy proceedings.$) MARKET APPROACH The market approach is based on the premise that the fair market value of securities for which no trading market exists can be inferred from recent sales of securities of guideline companies. These sales can take the form of (i) trades of minority interests of registered securities on a securities exchange or in the over-the-counter market and (ii) the sale of control in mergers or acquisitions. For purposes of this Valuation, Berkshire Capital applied guideline publicly traded company multiples of current fiscal year (2015E) pre-tax income, forward fiscal year (2016E) pre-tax income and current fiscal year (2015E) revenues to the Company's pro forma financial statistics for 2015E pre-tax income, 2016E pre-tax income and 2015E revenues, respectively. Berkshire Capital MA Business Valuation Standards, American Society of Appraisers, 2002. 6 Statement on Standards for Valuation Services No. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, American Institute of Certified Public Accountants, 2007. 7 Trugman, Gary R., Understanding Business Valuation, American Institute of Certified Public Accountants, 1998. Berkshire Capital Page 13 EFTA01079030 Rockefeller Financial Services, Inc. Valuation Methodologies applied the guideline acquisition multiples of last twelve months' ("LTM") pre-tax income and LTM revenues to the Company's pro forma financial statistics for 2015E pre-tax income and 2015E revenues, respectively. Berkshire Capital compares the subject firm's financial condition to the guideline publicly traded companies and guideline acquired companies in order to select the appropriate percentile multiples within the ranges defined by the respective peer groups. Berkshire Capital selected the median multiples from the guideline publicly traded companies and the median multiples from the guideline acquisitions for purposes of valuing the Company. Berkshire Capital assigns weightings to the indicated values derived from each of the reference guideline company multiples. In this Valuation, the weightings assigned for the guideline publicly traded companies were 35% on 2015E pre-tax income, 35% on 2016E pre-tax income and 30% on 2015E revenues. For the guideline acquisitions, the weightings assigned were 60% on 2015E pre-tax income and 40% on 2015E revenues. Adjustments to the Financial Statements. Where appropriate, Berkshire Capital may make certain adjustments to the historical, current and/or forward fiscal year financial statements in order to make the financial statements more meaningful for the valuation process. Adjustments may be appropriate for the following reasons, among others: (1) to present financial data of the subject and guideline companies on a consistent basis; (2) to adjust reported values to current values; (3) to adjust revenues and expenses to levels which are reasonably representative of continuing results; and (4) to adjust for non-operating assets and liabilities and the related revenue and expenses.a For purposes of this Valuation, Berkshire Capital made adjustments for the current fiscal year income statement, forward fiscal year income statement and current balance sheet to reflect the sale of the Rockit Solutions, LLC. INCOME APPROACH Financial Projections. Berkshire Capital prepares five- and ten-year financial projections of free cash flow and estimated terminal values at the end of the fifth and tenth years. The projections of free cash flow are intended to estimate cash available to pay dividends on basic shares of the Company. Present Value Analysis. The after-tax cash flows and terminal value are then discounted to present value at the estimated cost of equity capital, on both a five- and ten-year basis. The five- and ten-year DCF values are weighted 60%/40%. The disproportionate weighting attributed to the five-year DCF values is a function of the relatively greater level of confidence attached to five-year projections compared to ten-year projections. a ASA Business Valuation Standards, American Society of Appraisers, 2002. Berkshire Capital Page 14 EFTA01079031 Rockefeller Financial Services, Inc. Valuation Methodologies Discount Rate. Berkshire Capital uses a variation of the Capital Asset Pricing Model ("CAPM") to derive an estimate of the cost of equity capital for a subject firm: 9'1°'11 Ku = Rf + X ERP + RP, + RPu, where Ku = estimated cost of equity capital RI = risk-free rate (3 = beta ERP = general equity risk premium for the market RP, = risk premium for small size RP„ = risk premium attributable to the specific company, or nonsystematic risk Risk-Free Rate ( 1O. Berkshire Capital uses the long-horizon equity risk premiums published by Morningstar, Inc., which quantifies the return generated by stocks, as measured by the S&P 500, in excess of the 20-year constant maturity Treasury bond. To ensure comparability, Berkshire Capital references the 20-year constant maturity Treasury bond as the risk-free rate. The appropriate time horizon is a function of the indeterminate (i.e., long-term) life of the company being valued as a going concern, as opposed to the investor's expected holding period.'2 Beta ( B ). Berkshire Capital selects the median unlevered beta for the guideline publicly traded companies13 and then adjusts the unlevered beta for the subject company's targeted leverage ratio.'" Equity Risk Premium ( ERP). The equity risk premium is a prospective concept (i.e., an estimate of the premium required by the market in the future in order to accept the uncertain outcomes associated with owning equity securities). Unlike bond yields to maturity, market quotes cannot be obtained for the equity risk premium. Due to a lack of widely accepted forecasting techniques to estimate a forward-looking equity risk premium,ls•16 Berkshire Capital refers to historical data 9 Pratt, Shannon P., Robert F. Reilly and Robert P. Schweihs, Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 4th ed., McGraw-Hill, 2000. 143 Pratt, Shannon P., Cost of Capitol: Estimation and Applications, John Wiley & Sons, 1998. " Reilly, Robert F. and Robert P. Schweihs, The Handbook of Advanced Business Valuation, McGraw-Hill, 2000. 12 Ibbotson SBBI, 2014 Valuation Yearbook, Morningstar, Inc., 2014. 13 Pratt, Shannon P. and Alina V. Niculita, Valuing a Business: The Analysis and Appraisal of Closely Held Companies, McGraw-Hill, 2008. 14 Pratt, Shannon P., Cost of Capitol: Estimation and Applications, John Wiley & Sons, 1998. IS Equity Risk Premium Forum, sponsored by the Association for Investment Management and Research, November 8, 2001. 16 Damodaran, Aswath, Equity Risk Premiums (ERP): Determinants, Estimation and Implications —The 2011 Edition, Stern School of Business, 2011. Berkshire Capital Page 15 EFTA01079032 Rockefeller Financial Services, Inc. Valuation Methodologies for insights into the magnitude of the equity risk premium17 Berkshire Capital uses the 30-year average long-horizon equity risk premium published by Morningstar in the Stocks, Bonds, Bills and Inflation ("SBB1") series, reduced by the historical P/E multiple effect in order to eliminate the upward bias in historical data introduced by changes in investor expectations.18'19 This approach is consistent with a recent valuation opinion issued by the Delaware Chancery Court.2° The equity risk premium component of the estimated cost of equity capital represents the expected premium that holders of similar securities can expect to achieve on average in the future. The total return on the S&P 500 reflects both periodic distributions on, and capital appreciation or depreciation reflected by continuous trades in, minority interests of component stocks. While a control shareholder may be able to improve the cash flows generated by the acquired company, such improvements may not necessarily have an impact on the general risk level of the cash flows. Adjustments for minority or controlling interest value are more suitably made to the projected cash flows rather than to the discount rate. So long as there is no disproportionate return to certain shareholders, either through the enterprise cash flows or the equity rights, there is no distinction between minority owners and control owners in the estimation of 21,22 costs of equity capital. Size Premium (RP, ). Research published by Morningstar and others offers compelling statistical evidence of small firm premiums.32'23,20 Morningstar's annual small capitalization study sorts the universe of eligible stocks traded on the NYSE into deciles ranked by market capitalization, with deciles rebalanced quarterly, and calculates (1) betas for each decile since 1926 and (2) returns predicted by beta for each decile based on the average risk-free rate over the time horizon. If CAPM were functioning properly for small companies, all the decile portfolios would fall on the security market line. Instead, Morningstar's research shows that smaller stocks consistently generate returns in excess of the returns that would be predicted by CAPM. Berkshire Capital has developed a size premium calculator using the Morningstar data that " Reilly, Robert F. and Robert P. Schweihs, The Handbook ofAdvanced Business Valuation, McGraw-Hill, 2000. 19 Ibbotson, Roger G. and Peng Chen, "Long-Run Stock Returns: Participating in the Real Economy," Financial Analysts Journal, vol. 59, no. 1 (January/February 2003). 19 Kasper, Larry J., "S Corporation Valuations — An Analysis in Search of a Solution," Business Valuation Review (Winter 2007). n Global CT LP v Golden Telecom, Inc., 2010 WL 1663987 (Del. Ch.)(April 23, 2010). 31 Speech at the 2004 Thirty-Second AICPA National Conference on Current SEC and PCAOB Developments, by Todd E. Hardiman, Associate Chief Accountant, Division of Corporate Finance, Securities and Exchange Commission, Washington, DC, December 6, 2004. 22 lbbotson SBB1, 2014 Valuation Yearbook, Morningstar, Inc., 2014. 23 Banz, R., "The Relationship between Return and Market Value of Common Stocks," Journal ofFinancial Economics (1981). Pratt, Shannon P. and Alina V. Niculita, Valuing a Business: The Analysis and Appraisal of Closely Held Companies, McGraw-Hill, 2008. Berkshire Capital Page 16 EFTA01079033 Rockefeller Financial Services, Inc. Valuation Methodologies estimates the size premiums for the subject firm as well as the guideline publicly traded companies. This approach is 25 consistent with a recent valuation opinion issued by the Delaware Chancery Court. Security Market Line & Size Premium by Decile, 1926 - 2014 25.00% 20.00% • 3 15.00% 2 • 10.00% 1 f. itt 5.00% 0.00% 0.80 0.20 0.40 060 0.80 1.00 1.20 1.40 1.60 1.80 Beta — Company-Specific Risk Premium ( Rp, ). This risk premium accounts for additional elements of risk not captured by the systematic, or market, risk factor beta, such as: (1) relatively higher or lower volatility of economic income; (2) concentration of customer base; (3) key person dependence or small management base; (4) key supplier dependence; (5) abnormal present or pending competition; (6) pending regulatory changes; (7) pending lawsuits; or (8) relatively undiversified operations, by product or by geography.26,27 Recent valuation opinions issued by the Delaware Chancery Court have accepted the use of RPu so long as the risk factors are truly company-specific and not already reflected in zs In re Sunbelt Beverage Corporation, 2010 Consol. CA. No. 16089-CC (Del. Ch.) (Jan. 5, 2010). 26 Kasper, Larry J., Business Valuations: Advanced Topics, Quorum Books, 1997. 27 Reilly, Robert F. and Robert P. Schweihs, The Handbook ofAdvanced Business Valuation, McGraw-Hill, 2000. Berkshire Capital Page 17 EFTA01079034 Rockefeller Financial Services, Inc. Valuation Methodologies projected cash flows, beta or RPs, and the estimated RP. is based on specific financial analysis.28 Berkshire Capital incorporates volatility of economic income and risk of insolvency due to limited capital resources in the scenario analysis of the subject firm; as a result, these factors do not influence the magnitude of RP,,. For purposes of this Valuation, Berkshire Capital assumed that there were no material company-specific risk factors, so RP„ is assumed to be nil. Scenario Analysis. Cash flow projections should be based on the concept of expected cash flows rather than most likely or base- case cash flows.29 The determination of expected cash flows centers on the projection of future cash flows across a range of scenarios, to which probabilities are then attached. Berkshire Capital's valuation model performs the DCF analysis across 25 discrete scenarios. In the case of investment management firms, the scenarios are based on a range of inputs for two key value drivers: total return on managed assets and rate of net new business acquisition. Berkshire Capital has identified these two factors as those with the greatest influence on revenues, profitability and value. The scenario analysis is designed to capture, at least in part, the uncertainty inherent in operating the subject firm's business in the future, and as a result, introduces a broader range of potential outcomes into the ultimate determination of value than offered by a single scenario. The outcomes are then weighted based on an assessment of the appropriate probability distribution in light of the ranges of the respective value drivers relative to historical norms and expectations for the future. This probability distribution is ordinarily designed to reflect the assessment that the scenario outcomes exhibit symmetrical but declining probabilities the more the assumptions underlying a particular scenario diverge from the assumptions underlying the central scenario. Because we run multiple scenarios, we have automated all decision rules governing the subject firm's cost structure to mimic the concept that management teams adjust staffing and expense levels to changes in revenues brought about by market, industry and economic developments. 28 Rosenbloom, Arthur H., Bala G. Dharan and Ihsan Dogramaci, "Using Company-Specific Risk in the Delaware Chancery Court," Business Valuation Update (December 2011). 29 Ibbotson SBBI, 2014 Valuation Yearbook, Morningstar, Inc., 2014. Berkshire Capital Page 18 EFTA01079035 Rockefeller Financial Services, Inc. Valuation Methodologies VALUATION DISCOUNTS AND PREMIUMS Where appropriate, Berkshire Capital applies relevant discounts and premiums to values indicated by the income and market approaches. Discount for Small Size. In many cases, the firm being valued is substantially smaller than the guideline publicly traded companies, as measured by market capitalization. As a result, an adjustment must be made to valuations indicated by guideline publicly traded company valuation multiples in order to account for this differential. The size discount recognizes the direct relationship between P/E ratios and discount rates. Financial theory holds that the price in the numerator of the P/E ratio equals the PV of the market's consensus estimate of future free cash flows and terminal value discounted at the market's consensus estimate of the firm's cost of equity capital. For a given set of free cash flows, if the discount rate is higher due to the size premium, then the P/E ratio will be correspondingly lower. As a result, Berkshire Capital estimates the appropriate small-firm discount to be applied to public market multiples by calculating the percentage difference between the DCF calculated at the subject firm cost of equity capital and the DCF calculated at the median guideline company cost of equity capital. 32 Berkshire Capital'