Interim PE valuations need ‘rigor’

The same effort should be applied to quarterly valuations as to year-end calculations, according to Duff & Phelps’ David Larsen.

Interim valuations require more ‘rigor and consistency’, particularly as LPs increase their direct investment and co-investment activity, according to one valuations executive.

“Historically, GPs have always provided interim valuations, and it’s something that depends on the fund agreement. However, the key takeaway is the same rigor needs to be applied every quarter. You can’t say ‘I’m going to do a good job at year-end. Every time the GP reports, they need to have the same rigor behind it,” said David Larsen, managing director at Duff & Phelps, a global corporate finance and valuations advisor, at an alternatives media briefing last week.

The increase in co-investment and direct investment among LPs has left investors facing “the same valuations challenges” as GPs, Larsen added.

Among their needs is transparency over the mechanics of the valuations methodology, said one mid-market firm.

“Our [valuations] are based on the profitability and cashflow of the assets, and comparing that to similar companies in the market. We do our valuations in-house, but they are independently audited annually,” said Andrew Aylwin, partner at UK mid-market private equity firm, Lyceum Capital.

“I don’t think anything has changed in terms of valuations reporting and LP demands,” he added.

Valuations guidelines will be overhauled next year, when the American Institute of Chartered Professional Accountants introduces updated private equity valuations guidance. The global Mandatory Perfomance Framework is designed to enhance consistency and transparency in fair value measurement methodology. It is part of the Certified in Entity and Intangible Valuations certification, an optional qualification established by the industry body and accountancy firms in response to the Securities and Exchange Commission’s concerns over inconsistency in valuations methodologies. Those choosing to become CEIV-certified have to comply with the framework but it will likely be extended to those that are not certified to create a “gold standard” in valuations.

“[The new AICPA guidance] is rich with examples, because they wanted to have so many examples, you could not point to one as being a template,” Larsen commented. “It’ll be interesting to see from a global perspective, whether the International Private Equity and Venture Capital Valuation guidelines will continue to remain relevant, and be required by limited partner agreements.”