I have always believed and opined in assignments that tiered valuation discounts are valid. If a Master LP owns Slave LP interests and we are valuing a limited Master interest, there should be two sets of discounts.
I believe this because to deny one set of discounts denies the validity of the entity, and the same argument can be extended to deny the validity of both, eliminating all discounts, which is illogical and contrary to market evidence. I also believe that each entity’s restrictions create their own barriers to control and realization of underlying net asset value. I also believe it from market evidence: CDO-squareds (collateralized debt obligations that own other collateralized debt obligations) trade at massive discounts from parÂ
But recent Tax Court cases, discussions with peers, and rumination have identified another counterargument to tiered discounts that I believe is valid. If the Master entity is just going to hold Slave interests until they liquidate, then it is really posing no additional control or liquidity restrictions on the owners. Even though there are valid business reasons (creditor protection, ease of transferring Master interests as opposed to multiple Slave interests), the existence of Master is really not going to change anything.
Accordingly, in circumstances like this, I am not going to argue for tiered discounts (or perhaps for very small ones).