LPs struggle with fair value auditing

Nearly three-quarters (70 percent) of limited partners believe their fair valuation of private equity assets is not yet up to par with industry accounting standards, according to a recent survey.

Northern Trust surveyed approximately 50 of its LP clients (who together had a median investment of $2 billion in private equity) regarding their ability to meet reporting standards set by the US Financial Accounting Standards Board (FASB).

About half the respondents said their auditing process needed greater documentation in place to meet  ASU 2009-12, the FASB’s guideline for valuing private equity and other non-quoted assets. ASU 2009-12, which came into effect in late 2009, allows an investor to use the net asset value reported by the general partner to estimate their own fair value of an alternative investment.

However, the guidelines say that on top of LPs’ normal due diligence processes, procedures should be put in place to determine that the GP has used appropriate rigour in coming up with a fair value estimate, which fund managers then use to derive NAV. 

Nearly two-thirds of respondents (64 percent) said they have struggled to obtain sufficient information to verify a GP’s fair value calculation. 

“Clients are facing an increasingly complex landscape with regard to fair valuation rules for which minimal process guidance is provided,” said Paul Finlayson, an alternative assets product manager at Northern Trust.