CFO Forum: Deal teams still lead on valuations

Despite the growing demands from institutional limited partners and regulators that general partners introduce more independence into the process of valuing their assets, deal teams are primarily responsible for valuations.

According to a poll conducted at the 2016 PEI CFOs and COOs Forum Wednesday, approximately 68 percent of private equity firms said that their deal team, with some help from the accounting and finance staff, is mainly responsible for valuation work.

Of the 87 percent of the audience who said that they do their valuation work in house, only 23 percent said the accounting and finance team was primarily responsible for the valuation work, with some help from the deal team.

Having the investment team as the primary voice on the valuation committee has drawn scrutiny from regulators and investors alike, who believe it presents a conflict of interest. GPs argue, however, that investment professionals are best suited to value portfolio companies because they are closest to the assets.

Under the Alternative Investment Fund Managers Directive (AIFMD), GPs are encouraged to prove that the valuation function is independent from the portfolio management team to prevent any conflicts of interest. GPs can either hire a third party valuation services provider or value the portfolio in-house, provided that dealmakers are kept far enough from the process.