Daily valuations will be a ‘differentiator’ in the future

Daily valuation of level-three assets will be the future for private funds finance professionals, as the defined contribution market in the US and other sources of retail money cause demand for it to rise. That’s according to panelists on a webinar hosted by Kroll last week. But even now, institutional LPs continue to press their GPs for more timely reporting as a whole, from valuations to internal control checks and annual report auditing.

“I think moving to daily [valuations] is going to take more time, and of course that’s what will be required to really get into the 401(k) space,” said Alpinvest managing director and CFO Erica Herberg, adding that credit and perhaps core real estate would be among the first alternative assets to make daily valuations a reality. “But we’ll be talking about that a lot more in the coming couple of years as we see that landscape further develop.”

Herberg said that of course daily valuation will cost more and require more operational resources, but firms are always “trying to make our operations and processes smarter, better, faster,” and at some point technological innovations and process improvement will lead to it becoming viable.

“It takes a little mind-bending for some of us to figure out how we’re going to get there and operationalize it,” Herberg said. “But conceptually it’s quite feasible, and it’s also going to be a differentiator in our marketplace in the coming years.”

Overall, GPs are better at estimating fair value today than they were five to 10 years ago, Herberg explained. But, in its capacity as an LP itself, Alpinvest’s “needs of information and the timing of that information is really under continuous pressure,” she added. “We would appreciate swifter reporting from our GPs, of course…To get the reporting out to our LPs we really do rely on that GP info as a material input into our reporting.”

She also noted that while market practice has been to provide reports more quickly than the regulatory regime allows for, the range of timeliness in practice is still a “one of the challenges” Alpinvest has to manage.

Back in the present…

To the question of whether managers could produce more timely reporting, Karla Bullard, managing director and CFO of Madison Dearborn Partners, said her firm’s LPA requires unaudited financial reports to be issued within 45 days of quarter end, though the firm generally issues them within 25 to 30 days. For audited annual financials, that would be a taller ask from a documentation standpoint but can still be done, she said.

But could she whittle that down to five days, asked David Larsen, senior managing director of the valuations practice at Kroll?

“You probably could, but it would really [require] a full culture shift,” said Bullard, adding that there would need to be a firm-wide, full engagement on reporting from the measurement date for days, shaving off time for questions to be answered, cutting down time waiting for responses, ensuring everyone is on the same page and that results are properly understood.

Bullard added that preliminary results could probably be issued within five days of quarter end, but that “all the other reporting disciplines outside of just valuations – making sure PCAP statements and internal control reviews are done” would make such a short period for issuing full results difficult, saying 15 days was more doable.