Almost exactly a year ago today, the Private Equity Growth Capital Council (PEGCC) and the National Venture Capital Association (NVCA) formally endorsed valuation guidelines published by the International Private Equity and Venture Capital Valuation board (IPEV).
It was major news at the time and the implications of the endorsement continue to be huge. The industry’s US trade associations felt compelled to act because they could see that their member firms were enduring more grueling audits – mostly because the regulators' increased scrutiny of valuation practices (in line with SEC registration, AIFMD and so on) was encouraging auditors to play it extra safe.
A collective stand behind IPEV, the industry hoped, would make auditors feel more comfortable about how GPs value assets – because the approach was consistent across the industry globally (using IPEV as the standard).
Has it worked? That's debatable. But a new development ought to help. We’ve learned that IPEV has begun talks with the PEGCC, NVCA and the Institutional Limited Partners Association (ILPA) about all three taking a formal seat on IPEV's governing board. And the word on the street is that these talks are progressing well.
On paper, the move makes all sorts of sense. IPEV has its roots firmly in Europe: its three founding associations were the European Private Equity and Venture Capital Association, the British Private Equity and Venture Capital Association and the French trade body AFIC. But if it wants to present an industry-wide front on valuation, IPEV needs to look, feel and act global.
Apparently, the idea under discussion is that each US association would be guaranteed a permanent seat on the IPEV board, as well as on the IPEV committee responsible for nominating new members. Giving the US groups this elevated status – as opposed to being merely ‘endorsing associations’ – would surely help to convince auditors that IPEV is a genuinely global initiative, not just the European way of assessing marks. The addition of ILPA would be helpful too, because it shows that that IPEV’s work is not just a self-serving GP exercise.
Now before this can happen, there are some kinks that need to be worked out – not least funding, and the total number of board seats following the move. But those are easily resolved.
The bigger challenge is working out how to show auditors and regulators that IPEV is sufficiently independent from the self-interested trade groups that support it; to convince skeptical outside observers that IPEV’s work is objective and fair. Striking that balance won’t be easy; but to its credit, IPEV has so far developed a strong reputation as an organization whose guidelines are credible, practical and authoritative.
Here at pfm, it’s our hope that IPEV will eventually become the global benchmark for fair value marks. Too often CFOs are asked to crunch numbers and run models that are relatively unhelpful in terms of teasing out an illiquid portfolio company’s eventual exit price. And now the American Institute of CPAs (AICPA), the main professional body for US accountants, has put together a taskforce to create bespoke guidelines for private equity and venture capital valuation estimates, there’s a concern within the industry that audits will continue to be conducted in a way that doesn’t really sync with established practices. Which, of course, is all the more reason for the US trade associations to get behind IPEV now.