‘No single standard’

KKR's Euronext offering creates its own method for valuation, while publicly traded SVG adopts the IPEV guidelines.

Page 44 of the prospectus for KKR Private Equity Investors, the $5 billion vehicle recently taken public on the Euronext Amsterdam exchange, contains this pithy observation: ?There is no single standard for determining fair value in good faith and, in many cases, fair value is best expressed as a range of fair values from which a single estimate may be derived.?

This isn't necessarily what most private equity associations, including the creators of the International Private Equity and Venture Capital Valuation (IPEV) Guidelines, want to read.

Kohlberg Kravis Roberts' tutorial on fair value appears in a section of the 316-page document that details how KKR, the advisor to the public vehicle, has valued the various private holdings that will eventually become assets of KKR Private Equity Investors. The section, titled ?Unrealized Values of Investments Made by Private Equity Funds,? notes that KKR has its own formula for arriving at enterprise values of its private portfolio investments based on the price at which these assets would fetch if sold in an ?orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale.?

KKR's stated valuation methodology is an interesting addition to the ongoing debate over how best to report the values of private equity portfolio companies (see a related story on p. 30). Limited partners as well as accounting firms are pressuring GPs to exert more effort in developing fair-value methods of accounting, as opposed to the more traditional and conservative hold-at-cost approaches. Despite efforts on the parts of various industry trade associations, many GPs continue to claim their right to total discretion in stating what an investment is worth.

That said, KKR has hired valuation expert Duff & Phelps to review the firm's internally developed ?process? for fair-value accounting. But the document stresses that ?Duff & Phelps, LLC is not responsible for determining the fair value of any individual portfolio company and its role is limited to being an advisor and providing additional support to KKR's existing valuation policy and process.?

Duff & Phelps has given KKR's most recent pan-portfolio valuation effort a seal of approval, stating that ?the valuation of each of the portfolio company investments did not appear to be unreasonable.?

By contrast, a similar public vehicle, SVG Capital, which invests largely in Permira funds, has seen fit to declare public allegiance with IPEV guidelines developed by the BVCA, EVCA and AFIC. SVG's annual report notes that ?where the market for a financial instrument is not active, fair value is established by using recognized valuation methodologies, in accordance with International Private Equity and Venture Capital Valuation Guidelines.?

Another difference between the valuation approach of the two firms – SVG Capital lists in its annual report information and valuations of its 20 largest underlying investments, starting with yellow pages publisher SEAT Pagine Gialle. SVG values its stake in the company at £37 million, ?taking into account? the IPEV guidelines. Although it has yet to issue an annual report, the prospectus of KKR Private Equity Investors does not give the valuations of individual portfolio companies. (The PPM for its KKR 2006 Fund does).

How to value private companies in a public vehicle is a crucial question. As investors trade in and out of the shares on any given day, their decisions are based in part on their assumptions about the underlying value of the portfolio companies. For example, a seller who sells stock on Tuesday and then learns that a portfolio company was exited on Wednesday at a dramatic mark-up may very well file suit – and win.

Across four of KKR's most recent limited partnerships are 19 portfolio companies that do not have publicly traded equity securities (stocks make it easier to mark fair value). Those 19 investments constitute 64 percent of the total unrealized value of those four funds.

As more private equity vehicles go public, it will become increasingly crucial that public investors, regulators and accountants believe a legitimate system of fair value accounting is in place. In a pinch, SVG can always point to the externally developed IPEV standard. KKR can't. It will be interesting to see whether the latter approach is sustainable.

European fundraising topped €72bn last year
The European Private Equity and Venture Capital Association has issued final fundraising and investment figures for 2005. Unveiled at the association's annual meeting last month in Monte-Carlo, the figures show that the European private equity industry raised €72 billion ($91 billion) last year. This compares with €27.5 billion raised in Europe in 2004. Last year, five buyout funds raised more than €3 billion. Pension funds accounted for nearly 25 percent of the total raised. UK investors were the single largest source of capital for European private equity at 28.9 percent, followed by US investors at 23.7 percent. GPs based in the UK commanded 63.6 percent of the take, followed by French managers (16 percent) and German managers (4 percent). In 2005, European private equity firms invested €47 billion.

FASB seeks privatecompany comments
The Financial Accounting Standards Board, in conjunction with the American Institute of Certified Public Accountants, last month issued a joint proposal intended to ?improve the financial reporting process for private company constituents,? the two organizations announced in a press release. Parties interested in giving feedback to FASB and AICPA have until August 15 to do so at www.pcfr.org. ?[E]veryone who plays a role in private company financial reporting? is encouraged to send in comments. The joint initiative is intended to help the FASB decide whether there should be different accounting standards for private companies within the GAAP standards. The proposal seeks to ?enhance the transparency of [FASB's] standardsetting process for private companies.? Barry Melancon, AICPA president and chief executive, said in the statement: ?The importance of non-issuers to our capital market system cannot be overstated. While only about 17,000 companies are registered with the SEC, there are over 20 million that are privately held.?

Pakistan to grant PE tax exemption
Private equity firms are expected to get a boost following a report that profits made from private equity funds will be exempt from taxation for up to ten years. According to Pakistan's Daily Times, the Securities and Exchange Commission of Pakistan (SECP) has put forward budget proposals to Pakistan's Central Board of Revenue (CBR) that would grant all profits and gains from private equity funds and venture capital investments exemption from taxes, including withholding taxes, for up to ten years, depending on the life of the fund. Earlier this year, the Daily Times reported that Pakistan's prime minister Shaukat Aziz met with James Cann of UK private equity firm Hamilton Bradshaw to discuss incentives for private equity firms, hedge funds and other capital providers operating in the country.

F&C bolsters private equity funds team
UK fund manager F&C Asset Management has appointed Richard Nairn as associate director in its private equity funds team. Nairn joined the Edinburgh-based team in mid-June, having previously been a manager at Intelli Corporate Finance since February 2001. Intelli is a London and Edinburgh-based corporate advisory firm with a focus on asset managers and closed-end investment funds. While at Intelli, Nairn worked on a number of transactions including fundraisings, capital reorganizations, hostile actions, mergers and beauty parades. Prior to Intelli, Nairn trained and qualified as a chartered accountant with PricewaterhouseCoopers. F&C made its strategic entry into the private equity funds of funds market by acquiring the investment unit of Edinburgh-based Martin Currie Management in June 2005. The private equity team, headed by Hamish Mair, invests in private equity funds in the UK, continental Europe and the US.