What Is Derived Investment Value (DIV)?
Derived investment value (DIV) is a valuation methodology used to calculate the present value of future cash flows of liquidated assets, minus expenses associated with the liquidation process. Derived investment value is similar to the discount cash flow methodology.
The significance of expenses tied to the liquidation process will vary widely by different asset types. For a marketable portfolio of common equities, the costs may be negligible, while the sale of a specialized asset, such as a sports stadium, will carry significant marketing, legal, and administration costs.
- Derived Investment Value (DIV) is used to ascertain the present value of liquidated assets while also accounting for the costs of the liquidation.
- The DIV methodology was developed in the 1980s and early 1990s when a number of U.S. banks collapsed.
- Regulators at the time needed a way to sort through the non-performing assets and determine key factors such as what their value was, what could be salvaged, and what the time and expense might be for selling the asset.
Understanding Derived Investment Value (DIV)
During the 1980s and early 1990s, a large number of U.S. banks failed. Liquidating their assets became the responsibility of the Federal Deposit Insurance Corporation (FDIC). It created the Resolution Trust Corporation (RTC) to handle some of these tasks.
In order to create disposition strategies, the RTC first had to come up with a way to value the portfolios of nonperforming assets that it was in charge of. These portfolios were divided between private-sector contractors who were charged with recovering as much of the value of the portfolios as possible, and contractors who often received a higher fee compensation as the percentage of portfolio value actually recovered went past certain thresholds.
How Derived Investment Value (DIV) Works
Calculating derived investment value (DIV) was different and more complex than calculating the value of the underlying assets being liquidated. Factors that the derived investment value had to take into account included the different procedures various states had for mortgage foreclosures, as well as the amount of time a mortgage foreclosure was expected to take.
Valuation analysts had to estimate the amount of time it would take to recover collateral from bankruptcy proceedings, the amount of time it would take to sell the asset, as well as expenses associated with managing the process itself.
These assumptions were standardized but still resulted in risks since valuation analysts had to make subjective judgment calls.
In many cases, the collections the RTC was able to achieve exceeded the DIV, although this varied according to the type of equity partnership that was being used to liquidate the assets. Undeveloped and partially developed land had the lowest ratio of NPV of net collections relative to DIV, with commercial and multi-family nonperforming loans having the highest ratio.