Please describe for us your firm’s valuation committee meetings.
It’s a quarterly meeting, which tends to last a couple of hours, where we discuss and approve the valuations of our US and European fund of fund vehicles. SL Capital has $6.4 billion of active investments under management and the valuation process covers more than 300 individual fund and co-investment interests. This meeting is an opportunity for valuations to be challenged and the performance of individual managers to be discussed.
The valuation committee is two of the partners, the accounting team manager and me. About a week before the meeting we prepare a detailed valuation pack which gives us time to review valuations and form our own views.
How do you fact check the numbers GPs provide you?
The valuation process itself takes maybe four weeks to put together from the information that the managers we invest in have provided us. We drill down into all the underlying portfolio companies of our funds; examining how valuations have moved, looking at exits, new investments. In most of the funds we invest in we have somebody with an advisory board seat so we have good, regular contact with the managers.
And the investment team here have really detailed knowledge of the portfolio investments so we are able to form a pretty good view of the managers’ valuations and whether or not we feel the valuation is appropriate. To get that level of comfort we look into what methods managers are using to value their companies. The majority are on earnings multiple basis using quoted company comparables and are being valued on that basis. So it’s not just about checking the numbers we’re provided, but digging in to the methodology as well and ensuring we are comfortable with that.
What happens when there is disagreement on any given fund valuation?
We decide on each valuation by consensus, there is no formal voting mechanism. It’s more about everybody being comfortable with the valuation. It’s about having a process, a basis and a rationale for the valuations so that they are a fair representation.
What specific information do funds typically provide you with?
It varies hugely. We get a capital statement from all our funds, so that’s a valuation of our interest in their fund – a very explicit number. We also get a valuation of all the portfolio companies, but here is where reports begin to vary. Some GPs will give you a two or three page write-up of each investment while others just provide you a list of portfolio valuations. The more information the easier it is for us to ensure that the valuation they have given is appropriate.
What happens if a GP is late in providing you their numbers?
It’s unusual for GPs to be late per se but there are GPs that report on different time frames. Over the years it has moved to delivery as early as they can. Where we don’t have the information we need in the timelines we’ve created, we base a valuation using the IPEV guidelines. They allow us to use the most up to date information we have and adjust for any material events that we know about or transactional activity that has taken place. So we would adjust for any transactions that have happened between the last statement we have from the manager and then apply that.