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assertion (unsupported by empirical evidence) that fewer
administrative and regulatory controls on MIL’s investment
activity (as compared to that of institutional funds) should
result in a higher discount factor as a matter of course.19
Dr. Bajaj’s argument that the minority interest discount
factor for MIL’s equity portfolio should derive from the lower
end of the range of observed discounts is based primarily on the
premise that, on the valuation date, MIL was akin to a new
investment fund. Dr. Bajaj’s research, along with that of others
cited in his direct testimony, indicates that new investment
funds tend to trade at lower discounts than seasoned funds.
However, Dr. Bajaj’s analysis fails to recognize that, while MIL
was a relatively new entity on the valuation date, its equity
portfolio had been in place (in the hands of the contributing
partners) for years. Furthermore, of the four factors that Dr.
Bajaj specifically identifies as possible determinants of lower
initial fund discounts, only one-–lack of unrealized capital
gains-–perhaps would have informed the pricing decision of a
hypothetical buyer of an interest in MIL.20 The other factors
19 For instance, less regulation implies lower compliance
costs, which seemingly would offset, at least to some extent, any
pricing effect of relatively lax investor protections.
20 Although MIL inherited any unrealized gain with respect
to assets contributed by the initial MIL partners, see sec. 723,
the portion of such precontribution gain otherwise allocable to a
subsequent purchaser of an interest in MIL, see sec. 1.704-
3(a)(7), Income Tax Regs., generally would be eliminated if the
(continued...)
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