Comments welcome

The comment period recently ended on the draft for the 2009 International Private Equity Valuation (IPEV) Guidelines. Board members will now consider several changes intended to add more clarity and guidance to valuing private equity investments.

The original IPEV guidelines were originally launched in 2005 to meet the need for greater comparability across the industry as well as consistency with the International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP). However, IPEV board member David Larsen, managing director for financial advisory and investment banking firm Duff & Phelps, said that as general partners have done a better job in valuing their investments, and as the body of knowledge relating to private equity investments has increased due to the use of FAS 157 in the US, several “tweaks” to the rules needed to be made.

According to Duff & Phelps, the five main adjustments being proposed are:

The draft guidelines clarify that there is no “safe harbour” period where firms can use cost to estimate fair value. Simon Witney, a partner at SJ Berwin, said some people were under the impression there was a one-year period during which they could use the cost of an investment as a reliable current evaluation. Instead the valuer must determine fair value each time they report at each measurement date.

Additional guidance is provided to estimate the fair value of early stage or venture capital investments. Although the price of a recent investment cannot be used as a default to estimate fair value, in certain circumstances it may be the best determinant of fair value. A milestone analysis may also be used to calculate recent investments.

More description has been given on how to value a limited partner interest in a fund based on their attributable portion of reported fund NAV. The NAV provided by the fund can only be used by the LP to estimate fair value to the extent the LP has evidence the NAV was derived from proper fair value principals.

All features of an investment company should be considered in determining fair value. The previous rules implied that once someone concluded a valuation assessment, they needed to add on top of that a top marketability discount because the company was not liquid. The new rules clarify that when marketability is appropriately considered when estimating fair value, there is no need for a second marketability discount on top.

For the valuation of mezzanine debt, prices should be considered as to whether they are indicative of fair value. A discounted cash flow calculation can typically be relied on.

No date has been given yet for when the changes will be ratified, as Larsen says the board is still awaiting delayed comments from certain groups and is looking to react “thoughtfully” rather than merely quickly. It is also keeping in mind the long comment period ending in September for recent fair value measurement changes proposed by the International Accounting Standards Board, including providing factors that may indicate a market is not active and revising the definition of fair value as an exit price.

International Private Equity and Venture Capital Valuation Board

Chairman
Herman Daems (GIMV)

Members
Anthony Cecil (KPMG)
Herve Claquin (Abenex Capital)
Gilles Durufle (CVCA)
William Franklin (Conversus Asset Management)
W. Stephen Holmes (InterWest Partners)
William Hupp (Adam Street Partners)
David Larsen (Duff & Phelps)Jonathan Lowe (Permira)
Katharina Lichtner (Capital Dynamics)
Michael Maher (US Venture Partners)
Monique Saulnier (Sofinnova Partners)
Barry Zuckerman (CHAMP Equity)