FASBissues ‘enhanced’ fair value guidance

The Financial Accounting Standards Board in September issued ?enhanced guidance? for applying fair value accounting standards to assets and liabilities.

The standards issued by FASB are regarded as authoritative by the Securities and Exchange Commission and by the Institute of Certified Public Accountants. The new guidelines come as private equity firms are coming under increasing pressure from limited partners and their own auditors to adopt fair value techniques in reporting performance, as opposed to automatically holding portfolio company investments at cost shy of major new financial events.

Although private equity and venture capital are barely mentioned in Financial Accounting Standards No. 157 (FAS 157), the principles set forth ?apply to everyone,? according to a venture capital accounting expert.

However, much that is new in the FASB guidelines has to do with how to apply fair value to derivatives. A FASB statement read: ?Prior to this standard, the methods for measuring fair value were diverse and inconsistent, especially for items that are not actively traded. In the case of derivatives, the Board consulted with investors, who generally supported fair value – even when market data are not available – along with expanded disclosure of the methods used and the effect on earnings.?

The FASB defines fair value as: ?[T]he price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.?

FAS 157 goes into effect November 15, 2007.

The FASB divides fair value methods into three levels, the third (lowest) of which are ?unobservable inputs for the asset or liability?? (See boxed item)

However, the guidelines do not present venture capital or private equity portfolio items among the examples of Level 3 valuation. Instead, the guidelines make examples out of long-dated currency swaps; three-year options on exchangetraded shares; interest rate swaps; asset retirement obligations at initial recognition and reporting units.

The venture capital source said he expects private investment firms to struggle over how to identify ?the point at which ?most recent outside round? yields to other metrics such as ?comparable valuations? and ratios.?

While major accounting firms are still scrambling to interpret the new statement, says the source, ?Expect more scrutiny for 2006 audits.?

Candover hires operating partners
London-based European buyout firm Candover has hired two new operating partners. Clive Dolman was chief financial officer of Swissport, a ground handling business as well as former Candover portfolio company. He was also CFO of European Rail Catering, another Candover investment. Alexis Dormandy was chief marketing officer of Orange, the telecommunications company. Prior to Orange, he worked at Virgin Group in a number of capacities. ?Our operating partners will work with the highly capable management teams we back to make sure they have all the support they need to develop their businesses during the period of our investment,? said Candover managing director Colin Buffin in a statement.

Blackstone hires former McKinsey partner
In a bid to further expand its presence into a wide range of industries, private equity giant The Blackstone Group announced the hiring of former McKinsey & Company partner David McVeigh, a broadly experienced private equity veteran, as executive director within the private equity portfolio management group. As a partner at McKinsey, McVeigh led their North American Chemicals and Northeast Energy and Materials practices. He has worked with clients in the chemicals, pulp/paper, packaging, private equity, and industrial/consumer tools industries, specializing in corporate and business unit strategy, marketing and sales, innovation, and mergers and acquisitions. ?His extensive experience in implementing structural and fundamental changes in companies across multiple sectors will be an invaluable asset to our team,? said James Quella, senior managing director at Blackstone, in a statement. McVeigh has also spoken at numerous conferences on nanotechnology and other fields, and also contributed articles on specialty chemicals and e-commerce to the 2001 book Value Creation: Strategies for the Chemical Industry.

Doughty walks away from fund listing
Doughty Hanson, the pan-European private equity provider, has shelved plans to list a €1 billion ($800 million) private equity vehicle on the Euronext Stock Exchange in Amsterdam. On October 3, the firm released a statement saying ?concerns over the trading performance of similar recent transactions, which trade at discounts of up to 15 percent compared to the IPO price, mean that the offering has been postponed so that investors are not exposed to any potential discount.? Doughty, headed by founders Nigel Doughty and Richard Hanson, would have been the third private equity group to list a fund on Euronext in 2006. The firm had been actively marketing its listed fund in the second half of September. Doughty worked with Goldman Sachs and Citigroup, which also advised KKR and Apollo on their Euronext transactions earlier this year.

General Atlantic promotes in back office
Amid a transition of leadership at the global private equity firm, General Atlantic has announced a slew of promotions that includes several members of the firm’s support team. Christopher Lanning and David Rose, both general counsel at the firm, were promoted to managing directors. Thomas Murphy, General Atlantic’s chief financial officer, was also promoted to managing director. Lanning joined the firm in 2000 from the law firm Hunton & Williams. Rosenstein joined in 1997 from law firm Paul Weiss Rifkind Wharton & Garrison. Murphy joined General Atlantic in 1994 from the accounting firm Deloitte & Touche. The firm recently announced a leadership transition from Steven Denning to William Ford.

Level 3 leviathan
Below are excerpts from FAS 157, which details three levels of fair value accounting techniques:

To increase consistency and comparability in fair value measurements and related disclosures, this Statement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety?

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. A Level 1 input will be available for many financial assets and liabilities, some of which might be exchanged in multiple active markets (for example, on different exchanges)?

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data (market-corroborated inputs). If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability?

Level 3 inputs are unobservable inputs for the asset or liability, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk) developed based on the best information available in the circumstances…

This Statement clarifies that in many cases the transaction price, that is, the price paid (received) for a particular asset (liability), will represent the fair value of that asset (liability) at initial recognition, but not presumptively.

Ross acquisition is complete
AMVESCAP has completed its acquisition of distressed firm WL Ross & Co, the firms announced last month. The combined firm has assets of $4.4 billion. The deal was announced earlier in the year, and represents one of the very few instances of a private equity firm being acquired by another entity. WL Ross was founded in 2000 by Rothschild investment ace Wilbur Ross. AMVESCAP is led by Marty Flanagan. The firm provides an array of financial products to retail, institutional and high-net-worth clients.

Silverfern launches coinvestment platform
The Silverfern Group, a New York investment bank that specializes in mergers and acquisitions advisory work as well as private equity fund placement services, has launched a co-investment business that will place its clients’ capital alongside that of private equity firms in deals. Called Silverfern Co-Investment Partners, the business will leverage ?longstanding and deep relationships with private equity firms through [the firm’s] mergers & acquisitions advisory and? fundraising business,? according to a Silverfern press release. The firm will aism to invest between $50 million and $150 million in equity per transaction. The firm has already invested roughly $100 million in such opportunities, according to the release. Silverfern is led by chairman and chief executive officer Clive Holmes.

Partners Group listed fund closes above debut price
Partners Group, a Swiss listed fund manager, launched a €400 million ($508 million) vehicle on the London Stock Exchange’s Alternative Investment Market on September 27 with an offer of 40 million shares priced at €10 each. At the start of trading on September 28, the shares were slightly up at €10.25, the same as yesterday’s closing price. The listing was managed by Credit Suisse, Merrill Lynch and Bear Stearns. The fund will invest in direct private equity investments, with a smaller allocation for primary fund investments, secondary investments and investments in collateralized debt obligation fund and collateralized loan obligation funds. Partners Group itself floated on the Swiss Exchange with a market capitalization of SFr2.24 billion ($1.8 billion; €1.41 billion) in March.

Hands sounds warning for investors
Guy Hands, the founder and chief executive officer of European buyout firm Terra Firma, cautioned investors to be more discerning lest they become ?third class passengers? on the private equity bandwagon. Speaking at an industry conference in early October, Hands said there were now three classes of investors in private equity and the worst off were those who sat in ?economy.? ?They pay high fees for bad deals and get no access to good deals,? he said. By contrast, he said those sitting in first class get co-investment rights in good deals and pay no fees, while business class get access to good deals and co-investment rights but pay high deal fees. This situation has come about, Hands said, because demand for the asset class had hit unprecedented heights, allowing managers to skew terms in their favor.

Buyout bonanza unabated
Global private equity firms completed $563.8 billion (€445.25 billion) worth of deals in the first nine months of the year, according to figures from data provider Dealogic. This compares to $377 billion for the period in 2005. Of the LBO total, European firms sponsored deals with a combined value of $210.271 billion. The figures show that financial sponsor-backed buyouts represented 21 percent of total M&A activity, which stood at nearly $2.7 trillion. The Blackstone Group was the biggest revenue generator for investment banks in the period, providing $172 million of fee income. Cerberus Capital Management, an investment firm headquartered in New York, came in second in this period with $80 million of revenues. The Carlyle Group took third place in the fee ranking tables with $73 million.