ATTORNEY WORK PRODUCT — PRIVILEGED & CONFIDENTIAL
CALDERWOOD & HARKNESS LLP Tax Practice Group
MEMORANDUM
FROM: Robert Jansen, Lead Associate, Tax; Garrett Simmons, Working Associate, Tax — Calderwood & Harkness LLP
TO: Leonard Cross, Responsible Partner, Tax; Sylvia Hartwell, Billing Partner, Tax — Calderwood & Harkness LLP
DATE: June __, 2025
RE: Valuation Methodology Analysis for Private Letter Ruling Request — Solara Digital Infrastructure LP Cross-Border Fund-Platform Reorganization
MATTER NUMBER: 20250527-SDILP-PLR
CLIENT: Solara Digital Infrastructure LP
Right-click to update Table of Contents
I. Executive Summary
The purpose of this memorandum is to analyze and recommend the fair market value ("FMV") methodologies to be employed in valuing the portfolio company interests being contributed to Solara Consolidated Master Fund LP (the "Consolidated Master Fund") in connection with the five-step cross-border reorganization of the Solara Digital Infrastructure LP ("Solara" or the "Client") fund platform (the "Reorganization"). This memorandum is prepared as internal attorney work product to guide the overall valuation strategy and to ensure that the FMV determinations included in, or supporting, the private letter ruling ("PLR") request are analytically sound, appropriately documented, and defensible upon review by the Internal Revenue Service ("IRS").
The PLR request will be submitted to the IRS Office of the Associate Chief Counsel (International), CC:INTL, with secondary jurisdiction in CC:PSI (Passthroughs & Special Industries), and requires FMV determinations for all assets transferred in Steps 2 through 4 of the Reorganization. Several of the eight specific rulings sought depend directly on the accuracy and reliability of the FMV conclusions. Accordingly, the valuation methodology and its underlying assumptions represent a critical component of the PLR submission.
Redstone Advisory Group LLC ("Redstone"), an independent valuation firm based in New York, has been engaged to prepare independent FMV appraisals of all portfolio company interests. Marco DeLuca, Managing Director at Redstone, will serve as the lead appraiser on the engagement. This memorandum provides the analytical framework to guide Redstone's work, ensures alignment between the legal requirements applicable to the PLR request and the valuation approach, and identifies areas of potential IRS challenge that should be addressed proactively in the appraisal reports.
The Reorganization involves contributions of portfolio assets from four legacy offshore vehicles — Fund IV-A Cayman, Fund IV-B Lux, Fund V-A Cayman, and Fund V-B Lux — to the newly formed Delaware-domiciled Consolidated Master Fund LP. The aggregate value of the assets to be transferred is substantial:
• Total aggregate FMV of assets to be transferred: $7.75 billion
• Total adjusted tax basis: $6.03 billion
• Total built-in gain ("BIG"): $1.72 billion
• Aggregate liabilities assumed by the Consolidated Master Fund: $1.34 billion
• Total portfolio companies: 23 (11 held by Fund IV vehicles; 12 held by Fund V vehicles)
The FMV determinations are critical for multiple provisions of the Internal Revenue Code ("Code" or "IRC"), including: (i) the IRC § 721(a) contribution analysis and the associated nonrecognition treatment; (ii) the IRC § 704(c) built-in gain and loss account tracking that must be maintained by the Consolidated Master Fund using the remedial allocation method; (iii) the IRC § 752 liability allocation modeling for the $1.34 billion in assumed liabilities; and (iv) the IRC § 721(b) investment company exception analysis, which requires an asset-by-asset characterization based on FMV. Additionally, FMV determinations bear on the FIRPTA analysis under IRC § 897 for certain portfolio companies holding U.S. real property interests.
Based on the analysis set forth in this memorandum, we recommend that Redstone employ a multi-method valuation approach combining the discounted cash flow method ("DCF"), the comparable company analysis ("CCA"), and the precedent transaction analysis ("PTA"), with the primary methodology selected based on asset type. For the majority of the 23 portfolio companies, DCF should serve as the primary methodology, given its ability to capture the unique economics and cash flow characteristics of digital infrastructure and enterprise SaaS businesses. CCA and PTA should serve as secondary and tertiary corroborating methodologies, respectively. The asset-based or cost approach should be employed only as a floor or reasonableness check for infrastructure-heavy assets and in coordination with the FIRPTA analysis. The rationale for these recommendations is developed in detail in Sections IV and V below.
II. Background and Context
A. The Reorganization and the PLR Request
Solara Digital Infrastructure LP is a Delaware limited partnership (EIN 82-4917366) originally formed on March 17, 2014, with its principal offices located at 1200 Market Street, Suite 3400, Wilmington, Delaware 19801. As of March 31, 2025, Solara manages approximately $14.7 billion in assets under management ("AUM") across its fund platform. Solara sponsors private equity funds that target investments in two primary verticals: digital infrastructure (including data centers, fiber-optic networks, and edge computing facilities) and enterprise software-as-a-service ("SaaS") platforms.
Solara's current fund platform comprises six parallel fund vehicles organized across three jurisdictions — Delaware, the Cayman Islands, and Luxembourg. The Delaware vehicles (Fund IV LP and Fund V LP) serve as the primary domestic investment vehicles for U.S. taxable investors. The Cayman Islands vehicles (Fund IV-A Cayman and Fund V-A Cayman) serve as the primary offshore investment vehicles for non-U.S. investors and certain U.S. tax-exempt investors. The Luxembourg vehicles (Fund IV-B Lux SCSp and Fund V-B Lux SCSp) serve as the European-domiciled vehicles for European institutional investors and investors requiring Luxembourg-regulated fund access. This parallel structure, while originally implemented to address the distinct tax and regulatory requirements of different investor classes, has generated significant administrative complexity and cost.
The Reorganization will consolidate the four offshore vehicles — Fund IV-A Cayman, Fund IV-B Lux, Fund V-A Cayman, and Fund V-B Lux — into the newly formed Consolidated Master Fund LP, a Delaware limited partnership. Following the consolidation, two new Cayman Islands feeder vehicles (the "International Feeder" and the "Tax-Exempt Feeder") will be established to provide continued access for non-U.S. investors and U.S. tax-exempt investors, respectively, through a master-feeder structure.
The business rationale for the Reorganization is fourfold:
(i) Cost Savings. Solara estimates annual savings of approximately $3.8 million from the elimination of duplicative offshore administration, audit, and regulatory filing fees across the four offshore vehicles. These savings include reductions in Cayman Islands Monetary Authority ("CIMA") fees, Luxembourg Commission de Surveillance du Secteur Financier ("CSSF") regulatory fees, duplicative audit engagements, local registered office and directorship costs, and fund administration expenses.
(ii) OECD Pillar Two Compliance. The OECD's Pillar Two GloBE (Global Anti-Base Erosion) rules became effective for the Luxembourg entities beginning with fiscal year 2025. The consolidation mitigates the risk of qualified domestic minimum top-up tax ("QDMTT") exposure for the Luxembourg vehicles and simplifies the Pillar Two compliance framework by reducing the number of entities subject to the rules.
(iii) Simplified FATCA/CRS Compliance. Consolidation into a Delaware master-fund structure reduces the number of reporting entities subject to FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) obligations, thereby reducing compliance costs and the risk of reporting errors across multiple jurisdictions.
(iv) Governance Simplification. Solara's limited partners ("LPs") and the LP Advisory Committee ("LPAC") have requested streamlined governance. The current six-vehicle structure requires separate LP meetings, separate audit rights, and separate reporting for each vehicle. The consolidated structure will permit unified governance, reporting, and LP communications.
The PLR request is being prepared for submission to the IRS on or before August 15, 2025. The target effective date for Step 5 of the Reorganization (the final step, effectuating the transfer of assets from the legacy Cayman feeder to the Consolidated Master Fund) is December 1, 2025. The PLR submission seeks eight specific rulings from the IRS, several of which depend directly on the accuracy and defensibility of the FMV determinations for the contributed portfolio company interests. The specific rulings sought are detailed in the PLR Cover Letter and Ruling Request Memorandum, which are being prepared concurrently with this valuation methodology analysis.
B. Role of Valuations in the PLR Request
The FMV determinations for the 23 portfolio company interests serve multiple, overlapping legal and regulatory purposes in the context of the PLR request. We summarize the principal areas of relevance below.
IRC § 721(a) — Nonrecognition on Contributions to Partnerships. Section 721(a) provides that no gain or loss shall be recognized to a partnership or any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership. While nonrecognition under § 721(a) applies regardless of the FMV of the contributed property — the provision is automatic and self-executing — the IRS nonetheless requires FMV data in the PLR submission to assess the transaction's overall substance and economic reality. In particular, the IRS will evaluate whether the FMV of the partnership interests received by the contributing partnerships is commensurate with the FMV of the property contributed, as significant disparities could suggest that the transaction lacks economic substance or involves disguised sales under IRC § 707(a)(2)(B).
IRC § 721(b) / Treas. Reg. § 1.351-1(c)(1)(ii) — Investment Company Exception. Section 721(b) provides an exception to nonrecognition where the contribution would result in the "diversification of the transferors' interests" and the partnership would be treated as an "investment company" within the meaning of section 351. The regulations under Treasury Regulation § 1.351-1(c)(1)(ii), which apply by cross-reference to § 721(b), define the types of assets that constitute "stocks, securities, or other investment assets" for purposes of the investment company test. The FMV of each contributed asset is essential to demonstrate that the Consolidated Master Fund's portfolio consists of operating company interests — specifically, interests in digital infrastructure and SaaS businesses that generate active business income — rather than passive investment assets that would trigger the investment company exception. This analysis requires an asset-by-asset characterization of the portfolio, with FMV serving as the metric for determining asset composition.
IRC § 704(c) — Built-In Gain and Loss Accounts. FMV at the time of each contribution to the Consolidated Master Fund establishes the built-in gain or loss accounts that must be maintained and tracked under IRC § 704(c) for each contributed property. The total aggregate built-in gain of $1.72 billion (representing the excess of the $7.75 billion aggregate FMV over the $6.03 billion aggregate adjusted tax basis) must be precisely allocated across all 23 portfolio companies and tracked on a property-by-property basis. The Consolidated Master Fund will employ the remedial allocation method under Treasury Regulation § 1.704-3(d), which requires the partnership to create notional tax items to eliminate distortions caused by the ceiling rule. The accuracy of the FMV determinations directly affects the magnitude and allocation of these remedial items and, consequently, the tax consequences borne by contributing and non-contributing partners.
IRC § 752 — Liability Allocation. The FMV of the assets contributed and the resulting partnership interests received by each contributing partnership affects the allocation of the $1.34 billion in aggregate liabilities assumed by the Consolidated Master Fund. Under Treasury Regulation §§ 1.752-1 through 1.752-3, liabilities are allocated among partners based on their economic risk of loss (for recourse liabilities) or their profit-sharing ratios (for nonrecourse liabilities). The FMV of contributed assets affects the relative capital account balances and profit and loss sharing ratios, which in turn determine liability allocations. Additionally, the netting analysis under Treasury Regulation § 1.752-1(f) — determining whether any contributing partner experiences a net decrease in its share of liabilities that could trigger a deemed distribution under § 752(b) — depends on accurate FMV and liability allocation modeling.
IRC § 897 / FIRPTA. FMV determinations are required to assess whether certain portfolio companies — particularly data center operators (NovaBright Data Systems Inc. and Veridian Edge Computing Corp.) and fiber-optic network operators (Thorngate Fiber Networks LP) — are classified as U.S. real property holding corporations ("USRPHCs") within the meaning of IRC § 897(c)(2). A corporation is a USRPHC if the fair market value of its U.S. real property interests ("USRPIs") equals or exceeds 50% of the sum of the FMV of its USRPIs, its interests in real property located outside the United States, and any other assets used or held for use in a trade or business. This determination requires an allocation of FMV between real property components (land, buildings, data center infrastructure) and non-real property components (technology, customer relationships, brand, workforce).
Practical Considerations. As a matter of practice, the IRS Chief Counsel's Office, in reviewing PLR submissions involving contributions of appreciated property to partnerships, expects the following with respect to valuations: (i) engagement of qualified, independent appraisers with relevant industry expertise; (ii) a clear description of the valuation methodology employed and the rationale for its selection; (iii) explicit identification of key assumptions underlying the valuation; (iv) sensitivity analysis demonstrating the range of FMV under varying assumptions; and (v) where multiple valuation methods are used, a reconciliation of the results to arrive at a concluded FMV. Failure to meet these expectations may result in IRS requests for supplemental information, delays in PLR processing, or, in the worst case, adverse rulings.
C. Portfolio Overview
The Reorganization involves the contribution of interests in 23 portfolio companies held across the four offshore fund vehicles. Of these 23 companies, 11 are held by the Fund IV vehicles (Fund IV-A Cayman and Fund IV-B Lux) and 12 are held by the Fund V vehicles (Fund V-A Cayman and Fund V-B Lux). The portfolio companies fall into two primary verticals: digital infrastructure (encompassing data centers, fiber-optic networks, and edge computing facilities) and enterprise SaaS platforms.
The following five portfolio companies are representative of the broader portfolio and are discussed in detail throughout this memorandum to illustrate the application of the recommended valuation methodologies:
NovaBright Data Systems Inc. NovaBright is a Delaware corporation operating as a data center colocation and managed services provider. NovaBright operates three Tier III+ data center facilities located in Northern Virginia, Dallas-Fort Worth, and the Chicago metropolitan area, with an aggregate capacity of approximately 48 megawatts. The company has established long-term contractual relationships with enterprise customers and hyperscale cloud providers. NovaBright's FMV is estimated at $890 million, with an adjusted tax basis of $520 million, resulting in a built-in gain of $370 million. NovaBright is held 60% by Fund IV-A Cayman and 40% by Fund IV LP. Only the Fund IV-A Cayman 60% interest is being contributed to the Consolidated Master Fund in the Reorganization; the Fund IV LP 40% interest remains in Fund IV LP.
Crestline Cloud Solutions LLC. Crestline is a Delaware limited liability company that has elected to be treated as a disregarded entity for U.S. federal income tax purposes. Crestline operates an enterprise SaaS platform providing cloud-based supply chain management and logistics optimization solutions to mid-market and enterprise customers. Crestline is owned 100% by Fund IV-B Lux SCSp. Crestline's FMV is estimated at €340 million (approximately $367 million at the 1.08 EUR/USD exchange rate being used uniformly throughout the reorganization analysis), with an adjusted tax basis of €195 million (approximately $211 million), resulting in a built-in gain of €145 million (approximately $156 million). Because Crestline is a disregarded entity owned by a Luxembourg SCSp, the contribution in the Reorganization involves the underlying assets of the LLC flowing through, and the valuation must be conducted at the enterprise level.
Veridian Edge Computing Corp. Veridian is a Delaware corporation operating at the intersection of edge computing infrastructure and data center services. Veridian owns and operates a network of approximately 35 micro data center facilities positioned at network edge locations in major metropolitan areas across the United States, designed to serve low-latency applications including autonomous vehicle computing, IoT processing, and content delivery. Veridian's FMV is estimated at $1.12 billion, with an adjusted tax basis of $780 million, resulting in a built-in gain of $340 million. Veridian is held 55% by Fund V-A Cayman and 45% by Fund V LP. As with NovaBright, only the Fund V-A Cayman 55% interest is being contributed; the Fund V LP 45% interest remains in Fund V LP.
Thorngate Fiber Networks LP. Thorngate is a Delaware limited partnership that owns and operates approximately 14,200 route-miles of fiber-optic network infrastructure across the southeastern and mid-Atlantic United States. Thorngate generates revenue from dark fiber leases, lit services, and enterprise connectivity solutions. The fiber network has a long useful life, typically 25 to 30+ years, and the business is characterized by infrastructure-level cash flows with high recurring revenue. Thorngate's FMV is estimated at $670 million, with an adjusted tax basis of $490 million, resulting in a built-in gain of $180 million. Thorngate is held 100% by Fund IV-A Cayman, with no split ownership or minority interest issues.
Helix SaaS Holdings Ltd. Helix is a Cayman Islands exempted company that operates as a SaaS holding company, owning interests in three underlying SaaS operating businesses focused on human capital management, customer relationship management, and financial planning and analysis for mid-market enterprises. Helix's FMV is estimated at $445 million, with an adjusted tax basis of $310 million, resulting in a built-in gain of $135 million. Helix is held 100% by Fund V-A Cayman. Because Helix is a holding company, the valuation should reflect the aggregate value of the underlying SaaS businesses, with appropriate consideration of holding company overhead and any holding company discount.
In addition to these five named portfolio companies, the four offshore fund vehicles hold interests in 18 additional portfolio companies, which span both the digital infrastructure and enterprise SaaS verticals. The aggregate financial profile of the full 23-company portfolio is set forth in Appendix A.
III. Legal Standards for Fair Market Value Determinations
A. Definition of Fair Market Value
The standard definition of FMV for federal tax purposes is well established. Revenue Ruling 59-60, 1959-1 C.B. 237, defines FMV as:
"the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."
This definition has been consistently applied by the IRS and the courts across a wide range of tax contexts, including the valuation of interests in closely held corporations, partnership interests, and intangible assets. The hypothetical willing buyer and willing seller are assumed to be hypothetical persons dealing at arm's length, not specific individuals or entities. The transaction is assumed to take place in the open market, with all relevant information available to both parties.
In the context of the Reorganization, the FMV standard must be applied to the partnership interests and portfolio company equity interests being contributed under Subchapter K of the Code. The IRS has recognized that the valuation of partnership interests and closely held equity interests presents unique challenges compared to the valuation of publicly traded securities, given the absence of an active public market, the presence of restrictions on transferability, and the potential for complex capital structures with multiple classes of interests having different economic rights.
For purposes of the PLR submission, FMV must be determined as of the specific contribution dates for each Step of the Reorganization. Based on the current transaction timeline, the applicable valuation dates are as follows:
• Step 2 contributions: October 1, 2025
• Step 3 contributions: October 15, 2025
• Step 4 contributions: November 1, 2025
As discussed in Section VI.D below, the appraisals prepared for the PLR submission will likely use a pre-transaction valuation date (e.g., as of June 30, 2025, or September 30, 2025) with a roll-forward analysis or confirmation that no material changes occurred between the appraisal date and the actual contribution dates.
B. IRS Guidance on Acceptable Valuation Methodologies
Revenue Ruling 59-60 identifies eight factors that should be considered in valuing the stock of closely held corporations, all of which are applicable by analogy to the valuation of the portfolio company interests at issue here:
(1) The nature of the business and the history of the enterprise from its inception;
(2) The economic outlook in general and the condition and outlook of the specific industry in particular;
(3) The book value of the stock and the financial condition of the business;
(4) The earning capacity of the company;
(5) The dividend-paying capacity;
(6) Whether or not the enterprise has goodwill or other intangible value;
(7) Sales of the stock and the size of the block of stock to be valued; and
(8) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.
Revenue Ruling 59-60 further emphasizes that "no formula can be devised that will be generally applicable to the multitude of different valuation issues" and that "a sound valuation will be based upon all the relevant facts." The ruling expressly contemplates the use of multiple valuation methodologies, with the relative weight given to each depending on the facts and circumstances of the particular case.
Revenue Procedure 66-49, 1966-2 C.B. 1257, provides additional guidance on the valuation of closely held corporate stock for estate and gift tax purposes, including detailed discussion of capitalization of earnings and dividend-paying capacity approaches. While issued in the estate and gift tax context, the principles articulated in Revenue Procedure 66-49 are applicable by analogy to the valuation of partnership contributions under Subchapter K and have been cited in that context by both the IRS and the courts.
The IRS Appeals Division's Valuation Guide for Income, Estate, and Gift Taxes articulates a preference for the use of multiple valuation methodologies with appropriate reconciliation. The Guide recognizes three primary approaches to valuation: (i) the income approach (of which DCF is the most common method), (ii) the market approach (encompassing both comparable company analysis and precedent transaction analysis), and (iii) the asset-based or cost approach. The Guide counsels that the selection of methodology should be driven by the nature of the asset being valued and the availability of reliable data.
In the specific context of PLR submissions, the IRS Chief Counsel's Office generally expects the following elements in any valuation analysis submitted in support of a ruling request:
(i) Demonstration that the appraisals have been prepared by qualified, independent appraisers with relevant industry expertise and appropriate professional credentials;
(ii) A clear and detailed description of the valuation methodology employed, including the rationale for selecting the chosen methodology over alternatives;
(iii) Explicit identification and discussion of the key assumptions underlying the valuation, including growth rates, discount rates, terminal value assumptions, and any adjustments for marketability or control;
(iv) Sensitivity analysis demonstrating the impact of changes in key assumptions on the concluded FMV, typically presented in tabular format varying two or more key inputs;
(v) Where multiple valuation methods are employed, a reconciliation of the results, with an explanation of the weighting assigned to each method and the rationale for the concluded FMV.
C. Appraiser Qualifications and Independence
Redstone Advisory Group LLC, located at 750 Seventh Avenue, 21st Floor, New York, NY 10019, has been retained as the independent valuation firm for the engagement. Marco DeLuca, Managing Director and head of Redstone's Infrastructure and Technology Valuation Practice, will serve as the lead appraiser. Mr. DeLuca has over 18 years of experience in the valuation of digital infrastructure assets, data center portfolios, fiber-optic networks, and enterprise software companies, and holds the Accredited Senior Appraiser (ASA) designation from the American Society of Appraisers in Business Valuation.
Redstone's appraisals should comply with the Uniform Standards of Professional Appraisal Practice ("USPAP"), as promulgated by the Appraisal Standards Board of the Appraisal Foundation, and/or the American Society of Appraisers Business Valuation Standards ("ASA BV Standards"). Compliance with these standards will ensure that the appraisals meet the professional standards expected by the IRS and the courts, and will provide a basis for defending the appraisals if challenged.
The independence of the appraiser is a critical factor in establishing the credibility of the valuation with the IRS. Redstone has confirmed that it has no ownership interest, financial interest, or other business relationship with Solara, the Consolidated Master Fund, or any of the 23 portfolio companies that could compromise its independence or create a conflict of interest. The engagement is structured on a fixed-fee basis, meaning that Redstone's compensation is not contingent on the appraised values or the outcome of the PLR request. This fee arrangement satisfies the IRS's expectation that appraisals be prepared on a non-contingent fee basis to avoid any incentive for the appraiser to reach a predetermined conclusion.
Separately, Caldwell Pierce & Co. LLP ("Caldwell Pierce"), the Client's external accounting firm, is providing supporting financial data, historical U.S. federal income tax returns, Schedules K-1, and tax-basis balance sheets for all six fund vehicles. Helen Okamoto, Partner at Caldwell Pierce, with offices located at 400 Renaissance Center, Suite 2500, Detroit, MI 48243, is the lead engagement partner. Caldwell Pierce's role is limited to data compilation and provision of historical financial information; Caldwell Pierce is not performing any valuation work and will not issue any valuation opinion.
IV. Valuation Methodologies — Detailed Analysis
A. Income Approach — Discounted Cash Flow (DCF)
1. Overview and Application to Digital Infrastructure and SaaS Assets
The discounted cash flow method values a business by projecting its expected future free cash flows over an explicit forecast period and then discounting those cash flows to their present value using an appropriate weighted average cost of capital ("WACC"). The DCF method also incorporates a terminal value, which represents the present value of all cash flows beyond the explicit forecast period, discounted back to the valuation date. The sum of the present value of the explicit-period cash flows and the present value of the terminal value yields the enterprise value of the business.
The DCF method is particularly well suited for valuing the portfolio companies at issue in the Reorganization for several reasons:
(i) Data center operators (NovaBright Data Systems Inc. and Veridian Edge Computing Corp.) generate revenue under long-term contractual arrangements with enterprise customers and hyperscale cloud providers. These contracts, which typically have terms of three to ten years with renewal options, provide a high degree of recurring revenue visibility that supports reliable cash flow projections. Data centers also exhibit relatively predictable operating cost structures, with energy costs, maintenance, and labor representing the primary operating expenses.
(ii) Fiber-optic network operators (Thorngate Fiber Networks LP) generate infrastructure-level cash flows from dark fiber leases and lit services under long-term contracts. The underlying fiber infrastructure has a useful life of 25 to 30+ years, providing a long and predictable revenue stream. The capital-intensive nature of fiber network buildout makes the DCF method particularly appropriate because it can capture the timing of capital expenditures and the resulting cash flow profile.
(iii) Enterprise SaaS platforms (Crestline Cloud Solutions LLC and Helix SaaS Holdings Ltd.) operate subscription-based recurring revenue models with measurable customer churn rates, upsell and cross-sell rates, and expansion revenue dynamics. The recurring nature of SaaS revenue, combined with high gross margins (typically 65% to 85%), produces predictable cash flow profiles that are well suited to DCF modeling.
The DCF method offers several advantages as the primary valuation methodology. It captures the unique economics of each portfolio company, incorporating company-specific growth rates, margin profiles, capital expenditure requirements, and risk characteristics. It directly reflects management's expectations for the future performance of each business, as embodied in the financial projections. And it is the most commonly accepted primary methodology by the IRS for valuing operating businesses, particularly where the business has a demonstrated track record and a reasonable basis for projecting future performance.
The primary challenges associated with the DCF method are well understood. The method requires reliable financial projections, which are inherently uncertain and subject to management bias. The determination of an appropriate discount rate (WACC) involves multiple inputs, each of which involves a degree of judgment. And the terminal value component often represents a significant portion of the total enterprise value (frequently 50% to 70% for high-growth businesses), making the valuation sensitive to terminal value assumptions. These challenges are addressed through the use of sensitivity analysis, conservative base-case assumptions, and corroboration through alternative valuation methodologies.
2. Key Inputs and Assumptions
The reliability and defensibility of the DCF analysis depend on the quality and reasonableness of the key inputs and assumptions employed. For each portfolio company, the following inputs must be carefully developed and documented:
Projection Period. The explicit forecast period should generally be five to seven years, depending on the maturity and growth stage of the individual portfolio company. For more mature digital infrastructure assets (NovaBright, Thorngate) with established and stable operating profiles, a five-year projection period may be sufficient. For higher-growth businesses (Veridian, Crestline, Helix) that are still scaling or expanding into new markets, a seven-year projection period may be warranted to allow the business to reach a steady-state growth profile before applying a terminal value. The length of the projection period should be selected such that, by the end of the explicit forecast period, the business has reached a level of sustainable growth and profitability that can reasonably be extrapolated into perpetuity through the terminal value.
Revenue Growth Assumptions. Revenue growth assumptions should be based on company-specific data, including historical revenue growth rates, contracted revenue backlog, customer pipeline, and management projections. These company-specific inputs should be benchmarked against broader market growth rates for the relevant sectors, including market growth rates for hyperscale data centers (driven by enterprise cloud migration and artificial intelligence workloads), enterprise cloud migration adoption trends, edge computing market development trajectories, and fiber-optic network buildout plans reflecting the growing demand for bandwidth-intensive applications. Revenue growth assumptions should be conservative in the base case, with upside and downside scenarios reflecting the range of reasonable outcomes.
EBITDA Margins. EBITDA margin assumptions should reflect each company's historical margin profile and should be benchmarked against publicly traded comparable companies in the digital infrastructure and SaaS sectors. For data center operators, EBITDA margins typically range from 40% to 55% for stabilized facilities, with lower margins during periods of capacity expansion. For fiber-optic network operators, EBITDA margins typically range from 45% to 60%. For enterprise SaaS platforms, EBITDA margins vary widely depending on the company's growth stage, with mature SaaS businesses achieving margins of 25% to 40% and earlier-stage, high-growth SaaS businesses reinvesting more aggressively and operating at lower margin levels.
Capital Expenditure Requirements. Capital expenditure ("capex") assumptions are particularly significant for the digital infrastructure portfolio companies, which are capital-intensive businesses. Data center operators (NovaBright, Veridian) require ongoing capital investment for facility expansion, power and cooling infrastructure upgrades, and equipment refresh. Fiber-optic network operators (Thorngate) require capital for network extension, maintenance, and capacity upgrades. These capex requirements must be carefully modeled in the DCF because they directly affect free cash flow and, consequently, enterprise value. SaaS platforms (Crestline, Helix) are generally less capital intensive, with capex primarily limited to capitalized software development costs and infrastructure hosting costs. The distinction in capex intensity between digital infrastructure and SaaS assets has meaningful implications for the DCF analysis and should be clearly reflected in the projections.
discount Rate (WACC). The weighted average cost of capital should be derived from the capital asset pricing model ("CAPM") framework, incorporating the following components:
• Risk-free rate: Based on the yield on 20-year U.S. Treasury bonds as of the valuation date;
• Equity risk premium: Based on the historical equity risk premium as published by Westmark Consulting Group (now Sundial Advisors) or similar authoritative sources;
• Size premium: Based on the Westmark Consulting Group size premium data, reflecting the empirical observation that smaller companies exhibit higher required returns;
• Industry beta: Derived from publicly traded comparable companies in the digital infrastructure and SaaS sectors, unlevered and re-levered to reflect the target company's capital structure;
• Company-specific risk adjustments: Reflecting factors unique to the individual portfolio company that are not captured by the above components, such as customer concentration, geographic concentration, technological risk, and management depth.
Based on current market conditions and the characteristics of the portfolio companies, the expected WACC range is approximately 9% to 13% for digital infrastructure assets (reflecting their relatively stable, contracted cash flows) and approximately 10% to 15% for SaaS businesses (reflecting higher growth-related uncertainty and, in some cases, lower profitability). The specific discount rate for each portfolio company should be individually determined and documented by Redstone.
Terminal Value Methodology. The terminal value should be calculated using either the Gordon Growth Model (perpetuity growth method) or the exit multiple approach, with the selection depending on the characteristics of the individual portfolio company.
• Gordon Growth Model: Assumes that free cash flows grow at a constant rate in perpetuity beyond the explicit forecast period. The perpetuity growth rate should generally be in the range of 2% to 3% for mature digital infrastructure businesses, consistent with long-term nominal GDP growth and inflation expectations. For SaaS businesses, a slightly higher perpetuity growth rate may be justified if the business is expected to maintain above-market growth rates over the long term, but the rate should not exceed the long-term growth rate of the broader economy.
• Exit Multiple Approach: Assumes that the business is sold at the end of the explicit forecast period at a multiple of the terminal year's financial metric (typically EBITDA). The exit multiple should be based on the comparable company EV/EBITDA ranges for the relevant sector, with consideration of whether the terminal year represents a normalized or above/below-trend operating environment.
We recommend that Redstone apply both terminal value methods and present the results side by side to demonstrate consistency and reasonableness.
Data Sources. The financial projections underpinning the DCF analysis will be sourced from multiple inputs. Company-specific management projections will be provided through Solara's in-house team, with primary contacts being Stefan Dalmqvist, Head of Tax, and Douglas Wexford, Chief Financial Officer. Historical financial data, including audited financial statements, U.S. federal income tax returns, and tax-basis balance sheets, will be provided by Caldwell Pierce & Co. LLP. Industry research data, including market growth forecasts, competitive landscape analyses, and benchmarking data, will be sourced by Redstone from its proprietary databases and third-party research providers.
3. Currency Considerations
A subset of the portfolio companies are held through the Luxembourg vehicles (Fund IV-B Lux SCSp and Fund V-B Lux SCSp) and generate revenues and incur expenses denominated in euros. Crestline Cloud Solutions LLC, while organized as a Delaware LLC, is owned by Fund IV-B Lux SCSp and operates primarily in European markets with euro-denominated financials. Other portfolio companies held through the Luxembourg vehicles may similarly have euro-denominated operations.
For these euro-denominated businesses, cash flow projections in the DCF analysis should be performed in the functional currency (EUR), discounted at a euro-denominated WACC derived from European market parameters, and then converted to U.S. dollars at the applicable EUR/USD exchange rate. This approach is preferable to converting projected euro cash flows to dollars at forecast exchange rates, which would introduce exchange rate forecasting uncertainty into the valuation.
The EUR/USD exchange rate of 1.08 is to be applied uniformly to all euro-denominated valuations, consistent with the rate used throughout the reorganization analysis. This rate represents the prevailing spot rate as of the reference date agreed upon by the parties and has been used consistently across all transaction documents, including the PLR exhibits, the tax structure memoranda, and the partnership agreement provisions. Any material movement in the EUR/USD exchange rate between the date of the appraisal and the actual contribution dates should be addressed through a roll-forward analysis, as discussed in Section VI.D.
4. Sensitivity Analysis
We strongly recommend that Redstone present comprehensive sensitivity analysis for each DCF-based valuation, demonstrating the impact of changes in key assumptions on the concluded FMV. At a minimum, the sensitivity analysis should include:
• A two-dimensional sensitivity table varying the discount rate (WACC) and the terminal growth rate (for Gordon Growth Model terminal values) or exit multiple (for exit multiple terminal values);
• An additional sensitivity table varying revenue growth rate assumptions in the explicit forecast period;
• Where applicable, sensitivity to key company-specific variables such as customer churn rate (for SaaS businesses), capacity utilization (for data centers), or network buildout assumptions (for fiber operators).
The IRS may challenge aggressive assumptions embedded in the DCF analysis, particularly with respect to revenue growth rates and discount rates. A conservative base case, accompanied by clearly defined upside and downside scenarios, significantly enhances the credibility of the valuation. Presenting the range of FMV outcomes under these scenarios allows the IRS to evaluate the reasonableness of the concluded FMV within the broader range and reduces the likelihood of a successful challenge to any individual assumption.
B. Market Approach — Comparable Company Analysis (CCA)
1. Overview and Application
The comparable company analysis method values portfolio companies by reference to the trading multiples of publicly traded companies that are comparable in terms of industry, size, growth profile, and risk characteristics. The method works by identifying a peer group of publicly traded comparable companies, calculating relevant valuation multiples (such as enterprise value to revenue, enterprise value to EBITDA, or price to earnings), and applying those multiples to the corresponding financial metrics of the subject company, with appropriate adjustments.
CCA is well suited as a secondary or corroborating methodology for the portfolio companies at issue in the Reorganization for several reasons. For data center operators, a meaningful universe of publicly traded comparable companies exists in the digital infrastructure REIT and data center operator space, providing reliable market data. For SaaS platforms, a robust universe of publicly traded SaaS companies with available financial data and trading multiples supports the application of CCA. The existence of these public comparables in both of the portfolio's primary verticals makes CCA a particularly strong corroborating methodology.
The advantages of CCA as a valuation methodology are well recognized. It is market-based, relying on actual market prices at which comparable companies trade, making it transparent and objective. The IRS generally finds market data credible as a basis for valuation, and CCA provides a useful check on the reasonableness of the DCF analysis. If the DCF-based FMV is materially inconsistent with the CCA-based FMV, this may signal issues with the DCF assumptions that should be investigated.
The primary challenges associated with CCA include the need to identify sufficiently comparable public companies — no two companies are perfectly comparable, and differences in size, growth rate, margin profile, capital structure, and business mix must be accounted for through adjustments. Additionally, CCA values reflect the prices at which minority interests in publicly traded companies trade, which requires the application of adjustments for lack of marketability and, where applicable, control premiums or minority discounts, to arrive at an FMV for the non-publicly traded portfolio company interests.
2. Selection of Comparable Companies
The selection of comparable companies is a critical step in the CCA process and must be carefully documented. The IRS may challenge the selected peer group as either too narrow (excluding relevant comparables that would produce different results) or too broad (including companies that are not sufficiently similar to the subject company).
For the digital infrastructure portfolio companies, the comparable company universe should include publicly traded data center operators, fiber-optic infrastructure companies, edge computing firms, and digital infrastructure REITs. The selection should be based on companies that operate in similar segments of the digital infrastructure market, with comparable revenue profiles, geographic focus, and customer bases. Redstone should identify and document the full initial universe of potential comparables, the screening criteria applied to narrow the universe, and the rationale for including or excluding each company.
For the SaaS portfolio companies, the comparable company universe should include publicly traded enterprise SaaS companies with similar revenue scale, growth rates, margin profiles, and end-market focus. Given the diversity within the SaaS sector, the screening criteria should emphasize companies operating in similar application categories (e.g., supply chain management, human capital management, CRM, financial planning) and at similar stages of maturity.
The selection criteria for all comparable companies should include: (i) industry classification (SIC/NAICS codes and qualitative business description); (ii) revenue size (within a reasonable range of the subject company); (iii) revenue growth profile (similar trajectory); (iv) geographic focus (primarily U.S. and/or European operations); and (v) capital structure (leverage ratios within a reasonable range). Comparable companies should be documented in detail in the Redstone appraisal report, with a discussion of each comparable company's relevance and any limitations on comparability.
3. Key Multiples
The selection of appropriate valuation multiples should be driven by the financial characteristics of the subject company and the conventions of the relevant industry:
EV/Revenue. This multiple is most relevant for high-growth SaaS companies (such as Crestline and Helix) where profitability may not yet be fully mature and revenue growth is the primary driver of value. EV/Revenue multiples in the enterprise SaaS space can vary significantly depending on growth rates, from approximately 3x to 15x or more for the highest-growth companies. The EV/Revenue multiple should be applied to the subject company's trailing twelve-month ("TTM") or next-twelve-month ("NTM") revenue, with appropriate adjustments for differences in growth rates between the subject company and the comparables.
EV/EBITDA. This is the primary multiple for mature digital infrastructure assets (such as NovaBright, Thorngate, and the more established operations of Veridian) with stable EBITDA margins and established profitability. EV/EBITDA multiples for data center operators and fiber-optic network operators typically range from approximately 12x to 25x, depending on the quality and duration of the customer base, the geographic market, and the growth trajectory. For SaaS companies with more mature margin profiles, EV/EBITDA multiples are also relevant and may be applied as a secondary multiple alongside EV/Revenue.
EV/Subscribers or EV/MW (Megawatt Capacity). These are industry-specific multiples for data center operators that value the business based on capacity metrics rather than financial metrics alone. EV/MW is a widely used metric in the data center industry, reflecting the fact that a data center's revenue-generating capacity is directly tied to its power capacity. For NovaBright (approximately 48 MW) and Veridian (35 micro data center facilities with aggregate capacity to be determined), the EV/MW multiple provides an additional data point that captures the physical capacity of the business.
EV/Route-Mile. This is a fiber-optic network-specific multiple that values the business based on the extent of its physical network. For Thorngate Fiber Networks LP, with approximately 14,200 route-miles of fiber, the EV/Route-Mile multiple provides a capacity-based valuation metric that captures the replacement value and revenue-generating potential of the physical network infrastructure. EV/Route-Mile multiples vary depending on the density of the market served (metro vs. long-haul), the quality of the fiber plant, and the level of utilization.
4. Adjustments and discounts
Several adjustments may be required to translate the trading multiples of publicly traded comparable companies into an FMV for the non-publicly traded portfolio company interests:
discount for Lack of Marketability (DLOM). A DLOM is applicable because the portfolio company interests are not publicly traded and are subject to transfer restrictions typical of private equity fund investments. The DLOM reflects the economic disadvantage of holding an interest that cannot be readily sold on a public exchange. The appropriate DLOM typically ranges from 10% to 25%, depending on the size and liquidity of the subject company, the expected holding period, the existence and terms of any contractual rights to liquidity (such as put rights or tag-along provisions), and the overall market environment for private transactions.
The determination of DLOM is a frequently contested area in IRS examinations. The IRS has historically challenged DLOMs that it views as excessive, arguing that the discount overstates the illiquidity of the interest. Conversely, taxpayers have sometimes argued for higher DLOMs to reduce reported FMV. Redstone should carefully document the rationale for the selected DLOM for each portfolio company, citing empirical studies (such as restricted stock studies and pre-IPO transaction studies) and the specific factors that justify the selected discount within the range.
Control Premium / Minority discount. The comparables-based multiples reflect the trading value of minority interests in publicly traded companies. If the fund holds a controlling interest in the portfolio company, a control premium may be appropriate to reflect the additional value associated with control (ability to direct strategy, set compensation, declare dividends, etc.). Conversely, if the contributing vehicle holds a minority interest, a minority discount may be appropriate.
The ownership splits in the portfolio present nuanced control analysis issues. NovaBright is held 60% by Fund IV-A Cayman and 40% by Fund IV LP, and only the Fund IV-A Cayman 60% interest is being contributed. Similarly, Veridian is held 55% by Fund V-A Cayman and 45% by Fund V LP, with only the Fund V-A Cayman 55% interest being contributed. In both cases, the contributing vehicle holds a majority interest, which may warrant a control premium — or, at minimum, the absence of a minority discount. However, the analysis must consider whether the combined fund-level interest (e.g., 100% of NovaBright is held across Fund IV-A Cayman and Fund IV LP, both of which are managed by Solara) constitutes de facto control at the sponsor level, even if the individual contributing vehicle's interest is technically a majority rather than a full 100% interest. The specific terms of the governing documents (shareholder agreements, operating agreements, and limited partnership agreements) regarding voting rights, board composition, and protective provisions will be relevant to this determination.
Additional adjustments should be made for non-recurring items in the comparable companies' financials (such as one-time charges, litigation settlements, or extraordinary gains), excess cash or non-operating assets, and differences in debt levels between the comparable companies and the subject company. These adjustments ensure that the multiples are applied on a like-for-like basis.
C. Market Approach — Precedent Transaction Analysis (PTA)
1. Overview and Application
The precedent transaction analysis method values assets by reference to the multiples paid in recent mergers and acquisitions ("M&A") transactions involving comparable target companies. The method identifies relevant transactions, calculates the implied valuation multiples (based on the transaction price and the target's financial metrics), and applies those multiples to the subject company.
PTA is relevant for the portfolio companies at issue given the active M&A markets in both the digital infrastructure and SaaS sectors. The past several years have seen a significant volume of M&A activity in these sectors, driven by the accelerating demand for digital infrastructure capacity and the continuing consolidation of the SaaS landscape. This transaction activity provides a rich data set of observable market prices from which to derive valuation multiples.
PTA is best used as a corroborating or tertiary methodology alongside DCF and CCA. Its value lies in the fact that precedent transactions reflect actual prices paid by acquirers in arm's-length negotiations, providing a reality check on the DCF and CCA conclusions. The IRS generally views precedent transaction data favorably when the cited transactions involve sufficiently comparable target companies and are recent enough to reflect current market conditions.
The challenges associated with PTA include several factors that must be carefully managed. First, data availability for private transactions may be limited — many M&A transactions involving privately held companies do not publicly disclose financial terms, reducing the usable data set. Second, timing differences between historical transactions and the current valuation date may render the transaction multiples less reliable, particularly in sectors experiencing rapid growth or valuation compression. Third, transaction prices often include synergies — strategic acquirers may pay a premium reflecting cost savings, revenue synergies, or other benefits that they expect to realize from the combination — which can overstate the standalone FMV of the target company on a pre-synergy basis.
2. Selection of Comparable Transactions
Redstone should identify recent transactions (within approximately two to three years of the valuation date) involving target companies in the following categories:
• Data center acquisitions, including acquisitions of colocation facilities, hyperscale data center campuses, and managed hosting businesses;
• Fiber-optic network acquisitions, including acquisitions of metro and long-haul fiber networks, dark fiber portfolios, and lit services providers;
• Edge computing company acquisitions, including acquisitions of micro data center operators and edge computing platform providers;
• SaaS platform acquisitions, including acquisitions of enterprise SaaS companies across relevant application categories (supply chain management, HCM, CRM, FP&A).
The emphasis should be on transactions with publicly available financial terms, as these provide the most reliable data. Where financial terms are not publicly disclosed, Redstone may rely on industry databases (such as Bramwell Health IT, Glenrock Software, or Mergermarket) that compile estimated financial metrics for privately disclosed transactions, subject to appropriate caveats regarding data reliability.
The geographic scope should focus primarily on U.S. and European transactions, consistent with the operations of the portfolio companies. The selection criteria should consider: (i) the target company's industry classification and business profile; (ii) the transaction size (revenue and enterprise value); (iii) the type of buyer (strategic acquirer vs. financial sponsor); and (iv) the deal structure (100% acquisition, majority stake acquisition, minority stake acquisition).
3. Key Multiples and Adjustments
The key valuation multiples derived from precedent transactions are the same categories as those used in CCA — EV/Revenue, EV/EBITDA, and industry-specific multiples (EV/MW, EV/Route-Mile, EV/Subscribers). However, precedent transaction multiples require careful adjustments:
Control Premium Adjustment. Precedent transaction prices typically reflect a control premium paid by the acquirer, which is generally in the range of 20% to 40% above the pre-announcement public trading levels of the target company. Because the contributions in the Reorganization do not involve a change of control — the portfolio companies will continue to be managed by Solara, with the same investment team and strategy — a downward adjustment to the precedent transaction multiples may be appropriate to remove the embedded control premium and arrive at a standalone FMV that does not reflect synergies or control value that will not be realized in the contribution context.
Timing and Market Condition Adjustments. Transaction multiples from prior periods may not reflect current market conditions, particularly in rapidly evolving sectors such as digital infrastructure and enterprise SaaS. If market conditions have materially changed since the date of a precedent transaction — due to changes in interest rates, sector-specific growth expectations, or macroeconomic conditions — adjustments may be necessary to normalize the multiples to the current valuation date.
D. Asset-Based / Cost Approach
1. Overview. The asset-based or cost approach values a business based on the net asset value of its underlying tangible and intangible assets. Under this approach, the FMV of the business is determined by summing the FMV of all individual assets (including tangible assets such as real property, equipment, and inventory, and intangible assets such as technology, customer relationships, and trade names) and subtracting the FMV of all liabilities.
The cost approach variant estimates FMV based on the replacement cost of the company's assets — i.e., what it would cost to replicate the company's asset base from scratch, adjusted for depreciation and obsolescence. This approach is most applicable to businesses whose value is primarily derived from their physical assets rather than from going-concern value, growth potential, or intangible assets.
2. Limited Applicability
The asset-based approach is generally not recommended as the primary valuation methodology for any of the 23 portfolio companies in the Reorganization. All 23 companies are operating businesses with significant going-concern value and substantial intangible assets — including customer relationships, proprietary technology and software, brand and reputation, trained workforce, and contractual arrangements — that are not adequately captured by the cost approach. The cost approach, by its nature, tends to undervalue operating businesses because it does not capture the synergistic value of the assembled business as a whole, nor does it reflect the earnings potential and growth prospects of the business.
Notwithstanding this general limitation, the asset-based approach may serve a useful purpose as a secondary check or floor valuation for certain portfolio companies:
• For data center operators (NovaBright, Veridian), the physical infrastructure — including land, buildings, cooling systems, power distribution units, backup generators, and fiber connectivity — has identifiable replacement cost that can serve as a floor on the enterprise value. If the DCF or CCA analysis produces an enterprise value that is below the replacement cost of the physical assets, this would signal a potential issue with the income or market approach analysis.
• For Thorngate Fiber Networks L