PE firms struggle to agree on valuation

Outsourcing fund valuation tasks to third party service providers is not necessary under the Alternative Investment Fund Managers Directive, despite widespread belief to the contrary, according to some private equity fund managers.

The directive obliges fund managers to produce independent portfolio valuations at least once a year, and before a fund employs a new investment strategy or engages with a different type of asset.

But debating the matter at the British Private Equity and Venture Capital Summit last week, Graeme Dell, managing partner at private equity firm BC Partners said this didn’t mean the task had to be contracted out. Using a separate internal function to carry out independent valuations is acceptable both under the directive, and to LPs, he said.

“When AIFMD suggested independence there were a lot of firms that thought this meant that they had to use a third party, whereas of course you can be independent internally,” said Dell.

BC Partner’s LPs, which include California State Teachers' Retirement System, ATP Private Equity Partners and SL Capital Partners according to PEI data, appreciate the separate valuation function brought about by the directive, Dell said.

“A lot of LPs value understanding the methodologies that are being used to get to the valuation and this gives them a starting point to work off when they go on to run their own numbers,” he said.

Richard McDougall, a partner at private equity and venture capital firm Cabot Square Capital, shared this sentiment.

“There is a balance towards those LPs that are more comfortable with a firm’s internal process and there are some that like to have discussions as to why the firm is not engaging third parties,” he said.

“However, when they [LPs] understand the vigorous process, the degree of understanding and the cost of putting an external third party in place, most LPs are happy with the status quo and recognize that it is likely that a third party valuation agent is, broadly speaking, going to perform quite a similar function to an external auditor.”

Offering a counter argument, Jordi Francesch, head of asset management at Glenmont Partners said that he is in favour of using a third party valuer, and the firm’s LPs appreciate this.

“Valuation is based on assumptions. I think that it is a healthy exercise for someone else to have a look at the same numbers that you have and come up with the numbers themselves. I think that LPs value it because it does not come from the GP it comes from someone else.”

Dell also acknowledged that despite not being for his firm, working with a third party valuer is actually very helpful for providing a third party perspective and an alternative approach and view to looking at a particular asset.