IPEV tweaks fair value guidelines

Last week the International Private Equity and Venture Capital Valuation Guidelines Board (IPEV Board) released an updated set of valuation guidelines that harmonises its definition of fair value with US and international accounting standards. 

In mid-2011 the Financial Accounting Standards Board (FASB), which sets US standards, and the International Accounting Standards Board (IASB), the standards used by most other countries, created a common definition of “Fair Value” – which represents the exit price that would be received to sell an asset in an orderly transaction at the time of measurement. 

However, FASB and IASB were not able to converge on exactly how an asset should be measured when determining its fair value. IASB says an asset’s “unit of account” should be measured as a single or individual share. FASB however guides users to consider how market participants would likely buy or sell a specific asset, whether it be company shares or a financial derivative.  

IPEV Board member David Larsen of Duff & Phelps explained to PE Manager why he feels the US approach is more practical for private equity managers: “Let’s say you own 80 percent of a company. You can value a single share and then multiply that by your 80 percent equity stake under international standards, but that value doesn’t necessarily account for the value associated with control and size of the position. The market understands there is value in owning 80 percent of a company compared to a single share because you have greater influence over the company’s management and decision making process, which US standards account for.” 

As a result, Larsen believes US standards will continue to be GPs’ preferred financial reporting guidelines. Historically international standards were ignored by most of the world’s private equity chief financial officers because of its rules on “consolidation” – which required buyout funds to roll up their portfolio companies into one jumbled financial statement. Over the summer of 2012 IASB began reversing its position on consolidation, however the board’s position on unit of account measurement will likely still leave international standards undesirable, according to market sources. 

For private equity managers, practical valuations guidelines are particularly important given the long-term and illiquid nature of the asset class. 

“We’re pleased to report that more and more limited partner investors in private equity are requesting that their general partners comply with the IPEV valuation guidelines to help assure credible reporting of fair value estimates,” said in a statement Stephen Kempen, IPEV Board member and funds administration director for Apax Partners.