Don’t dawdle

A new staff position issued by the Financial Accounting and Standards Board (FASB) that clarifies the requirements for private equity valuation reporting will require more rigorous, timely reporting by GPs if they want to keep their limited partners happy.

The  proposed guidelines, known as FAS 157-g, apply to investment companies that have calculated net asset value per share in accordance with the AICPA Audit and Accounting Guide, Investment Companies. According to the release by FASB, in circumstances in which net asset value per share is not determinative of fair value, a reporting entity is permitted to estimate the fair value of an investment within the scope of this FSP using the net asset value per share without further adjustment, if “the net asset value per share of the investment is determined in accordance with the investment companies Guide as of the reporting entity’s date.”

“What this says to me is that LPs that have the same measurement date, for instance their internal reporting is as of 12/31 and they use 12/31 fund financial statements, they can use the GPs reported NAV without adjustment,” said Katita Palamar, head of operations, Research Business Unit, for Cogent Partners. “In these cases, it clearly states that NAV can be used as ‘a practical expedient’ to estimate fair value, but it doesn’t say that NAV equals fair value.”

The guidelines also require reporting entities to disclose information including not only the fair value of investments within the scope of the FSP, but its best estimate of the remaining life of a “finite lived investment”, the amount of unfunded commitments related to an investment and terms and conditions related to an investment.

According to David Larsen, managing director for financial advisory and investment banking firm Duff & Phelps, the proposal will provide welcome relief to LPs in valuing interests in a fund. “It encompasses the funds that it should, the scope has been well articulated and it takes the issue of secondary market pricing off the table,” he said.

The two main consequences once the guidelines are passed will be that 1) LPs must determine whether the GP is delivering robustly reported fair-value-based NAV, and 2) it must be “in phase” as of the same date, meaning “if an LP is reporting as of 3/31, then the NAV delivered by the GP has to be at 3/31,” Larsen said. “If both those two situations exist, then the LP is permitted to use the fair value for the limited partner.”

However, as the NAV must be as of the same date as the LP financial statements, this will require general partners to get their reports out on a more timely basis than they are used to. In the past many GPs reported on a delayed basis, and many LPs have faced difficulties if required to report year-end figures prior to receipt of the year-end fund financials, which typically arrive in April or May of the following year, according to Cogent.

“The more timely and rigorous a general partner is in its delivery of fair-value-based NAV, the easier it is for the limited partner; the less rigor and less timely, the more work placed on the LP’s shoulder,” Larsen said. “Because if a general partner is late, if the GP takes all 90 days after year-end and the LP has to report earlier than that, then the LP has to estimate the net asset value as of their financial statement, and that is extra work.”

This may be an adjustment for many firms. Landmark Partners partner Tina St. Pierre highlighted the lack of consistency in GP reporting during a recent panel on FAS 157 reporting requirements during the PEI Media Investor Relations and Communications Forum in New York. In particular, she noted, many smaller firms have done better than their larger counterparts in getting out more information in a timely manner.

All this will mean more work for GPs, but it will save on dealing with complaints from investors down the road. “A GP that wants to help his LPs must clearly articulate how they have come up with fair value, do they use a third party, what are their policies and procedures,” Larsen said. “It demonstrates that best practice for general partners is to rigorously determine NAV as quickly as possible, because that will endear them to their limited partners.”