The removal of at-investment cost from the International Private Equity Venture Capital Valuation Guidelines has “left some GPs asking questions as to how much additional work they should be doing”, Ryan McNelley, managing director of portfolio valuations at Duff & Phelps told Private Funds CFO.
In late December 2018, IPEV, a trade group that gives guidance on private fund valuation methodology, released its latest valuation guidelines and removed the use of the price of a recent investment as a standalone tool to calculate fair value, as reported by Private Funds CFO. Firms are left with questions of “how to interpret the IPEV guidelines, and about how much work it will require to adhere to the new guidelines,” McNelley says.
As time goes on firms “need to document why the expectations are the same as the recent investment or how and why perhaps those expectations have changed since that last investment,” says Francis Mainville, a senior vice-president at Valuation Research Corporation. “Expectations in the VC world may or may not change significantly over time, absent material developments. If developments since ‘at investment’ do not support materially different exit expectations, holding value flat to ‘at investment’ may be the right answer if supported sufficiently with documentation.”
“For some there may be more work to do to establish a regular practice of reviewing what’s changed, either in the macro or market environment, or with the company specifically that might suggest a change in value. This could include performing a more traditional analysis such as a market approach or a discounted cashflow which are admittedly sometimes difficult to apply in an early-stage context,” McNelley says.
But Craig Ter Boss, a principal at EisnerAmper, argues IPEV’s change really just brings it into line with US GAAP standards. “I’m not sure where that confusion came from. I would say that it was pretty clear under US GAAP for many years prior to IPEV. I think now the valuation guidelines under the IPEV are more in line with the international financial reporting interest and US GAAP. So, you no longer have these conflicting viewpoints on the same matters.”