Blinn Cirella is the CFO of Saw Mill Capital, a lower mid-market private equity firm based in Briarcliff Manor, New York. The firm, which she joined in 2006, focuses on acquiring industrial and commercial service, specialty distribution and manufacturing businesses with enterprise values of $25 million to $200 million. We spoke to Cirella about her experience and opinions about valuation committees in private equity firms.
What is the primary function of the valuation committee?
The primary function is to ensure consistency in our valuation process for each portfolio company as well as the portfolio in general.
In your firm how is it decided who is a part of a valuation committee?
I don’t really recall how we chose, but there’s the chief financial officer (because I’m responsible for all financial reporting), the chief compliance officer (because we view the committee’s purpose as a compliance function) and the managing director (because he oversees all the investments and investment professionals).
How often do you meet?
We meet every quarter to review valuations.
How often should a successful valuation committee meet?
I am on the steering committee of ACG PERT. A few years ago, the steering committee wrote a series of best practices for a few compliance-related processes. Valuations was one of those processes (I co-wrote this one). We determined that best practice is valuing every quarter. However, that does not mean every portfolio company should change value each quarter. Some will hold value for a few quarters, others will move more frequently. So overall value will likely change every quarter but not all portfolio company values will change every quarter.
Do potential investors ever question valuation committees?
We have never been challenged by a potential investor about valuations.
What are some common misconceptions when it comes to how valuation committees’ function?
That’s a good question! Perhaps people think this process is not really taken seriously and that it is more to make the SEC happy. That is why the committee was started, but I think we have found the process to be a very useful exercise that ensures discipline and consistence. We talk about each portfolio company and if we feel an increase, decrease or no change is valid.
Has the SEC ever questioned your committee?
We have not been audited by the SEC
Should CFOs be involved in valuation committees? Why or why not?
Yes, I think CFOs should be involved. They are the ones responsible for financial statement reporting. They may also be the ones answering questions from current LPs (although I have never experienced this). Also, after a company is sold and money is held in escrow and reserve, I have found the CFOs are the most knowledgeable about how much money has been spent and what may still need to be paid.