Room for interpretation

Valuation, despite the advent of FAS 157, is hardly an exact science.

The privately held companies in most portfolios offer few data points, and few direct competitors to analyze, especially at the lower end of the middle market. The only accurate test of value, as many CFOs are quick to point out, is an exit, and that test doesn't arrive for years in this business. Value remains in the eye of the beholder, even if the Financial Accounting Standards Board tells firms what they should be looking at. The ample room for interpretation is exactly what keeps GPs and auditors up at night.

At PEI Manager, we've been sensitive to this issue, introducing a monthly ?Valuation Challenge? recently that presents readers with tricky valuation scenarios and guides them through the solutions. For this issue, which is solely devoted to the topic, Jennifer Harris and Rob Kotecki sit down with a few CFOs and an auditor in New York to discover how firms are developing ?fair value? policies and ironing out the wrinkles that FASB couldn't predict. Sure enough, they all agreed there's room for ?judgment,? despite the new guidelines in place. Even the auditor agreed that valuation is more of a range than a data point. Amanda Janis interviews the CFO of London-based Phoenix Equity Partners who, like his peers across the Atlantic, admitted the toughest part of valuation is ?quantifying by gut instinct.?

Elsewhere in the issue, we grapple with the complexities of valuation in club deals, where consortium members may value the same company in wildly different ways at any given moment ? and learn that both LPs and auditors are sensitive to those differences. We also offer some expert commentary from the financial advisory firm FTI Consulting, on how an uncertain economic climate is making fair value even more difficult to determine, and how best to address the peaks and valleys of a company's performance these days.

If you're reading this, you are no doubt all too aware of those challenges. We hope this issue will offer some insights and advice that will allow you to rest easier.

Regards,

By David SnowDavid.s@peimedia.com