Valuation Guidance for Fund Managers
The International Private Equity and Venture Capital Valuation Guidelines (IPEV) Board recently issued guidelines for fund managers and investors applying the IPEV Valuation Guidelines in connection with quarter-end reporting and valuation of portfolios as of March 31, 2020. Given the magnitude of the current coronavirus crisis accompanied by significant economic uncertainty, the IPEV Board highlighted its guidelines for determining fair value. Although not all fund managers apply IPEV Valuation Guidelines, the guidelines are useful reminders of issues to consider in asset valuation.
The IPEV Board guidance makes particular note of the following:
- Strong valuation processes should continue to be followed.
- Valuation processes should be consistently applied across all investment types, industries and stages of investment.
- It may no longer be appropriate for recent transaction prices, especially those from before the expansion of the pandemic, to receive significant, if any, weight in determining fair value.
- Fair value does not equal a “fire sale” price.
- Fair value does represent the amount that would be received in an orderly transaction using market participant assumptions in the current market environment.
- Fair value is based on what is known and knowable at the valuation date.
- A view may need to be taken as to the potential for and impact of possible government relief programs that may impact individual companies and the overall economic environment.
- Care should be taken not to “double dip” with respect to valuation inputs. If performance metrics have been adjusted to take into account lower expected performance, an appropriate multiple should be applied rather than a multiple derived from comparable public companies whose results have not yet included lower expected performance.
- Market participant views matter. Greater uncertainty may translate into greater risk, which may translate into greater required returns, which may translate into lower asset values.
The IPEV Board further highlighted valuation principles with respect to certain types of investments, which should be considered on an investment-by-investment basis:
- Notwithstanding that public markets are currently very volatile, financial reporting rules remain in place.
- Appropriate valuations must be determined which reflect the current market environment, including risk and uncertainty in projections and historical results.
- The fair value of a debt investment, in the absence of actively traded prices, is generally derived from an analysis taking into account credit quality, interest and term.
- Par value or face value or cost value is not automatically fair value, even if there is sufficient enterprise value to cover the liability.
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- Last reported Net Asset Value (NAV) if based on the fair value of underlying investments is generally the starting point for estimating fair value.
- Last reported NAV in many cases, however, is September 30 or December 31, 2019, and thus may no longer be indicative of fair value.
- Given the potential significant change in value of underlying investments, adjustments will need to be made – hence the need for GPs to report as timely as possible.
The IPEV Board stated that even in volatile dislocated markets, fair value remains the most relevant and reliable information for LPs, and that LPs continue to be best served by GPs providing timely fair value information as of March 31, 2020.
At Stroock, we have established a multidisciplinary task force focused on coronavirus-related legal issues. Our aim is to provide holistic and proactive business guidance.
Please do not hesitate to contact us with any questions or concerns you may have during this period, including assistance drafting any documentation referred to herein.
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