IPEV reaffirms commitment to fair value

Ashley Wassall and Emanuel Eftimiu
01 December 2008

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At a recent press conference in London, the International Private Equity & Venture Capital Valuation board (IPEV) emphasised its support for the fair value methodology as the best measure of assessing the value of private equity portfolio companies and funds. Fair value has become a hotly-disputed topic in the current climate due to its inherently subjective nature, with IPEV board member Anthony Cecil, head of private equity assurance at KPMG, describing it as "an art and not a science." This issue is compounded by the lack of comparables in the current market, with the transaction volume of illiquid assets low and public markets in a seemingly constant state of flux.

The problem of judgement is addressed by a set of guidelines published by IPEV, which comply with the principles of US Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). Board chairman Herman Daems, chairman of listed Belgian private equity group GIMV, emphasised that these guidelines have now been endorsed by more than 40 trade bodies around the world, and that they are "an attempt to make the regulations work in practice by applying a centralised and comparable standard."

Deams also pointed out, however, that IPEV is "not designed to be a policing group," and as such discrepancies in how the guidelines are implemented are inevitable. Fellow board member David Larsen, managing director at Duff and Phelps, suggested that "the pressure has to come from LPs."

Indeed, LPs are at the heart of the fair value debate. Cecil, for example, suggests that fair value reporting can serve a useful function in offsetting the "denominator effect" for investors. "If everything else in the portfolio is falling in value then LPs will want the private equity allocation to fall as well, so that they don't become over-allocated and can still make new commitments," he explained. Furthermore, Larsen argued that the quality of reporting is important to LPs in making decisions over which manager to invest in, something that becomes difficult if there are no metrics on which to base such a decision.

One issue not yet decided on was how funds-of-funds can effectively implement the guidelines. Cecil stressed the problem of timing, given that underlying data from the primary fund manager takes time to be filtered down to the fund-of-fund as LP. This inevitably means that the fund-of-fund itself is then reporting out of date information to its own investors and is therefore effectively not complying with fair value requirements. Additionally, the subjective nature of all the valuations from the underlying funds, which can differ widely even in relation to the same asset, makes an objective value doubly difficult to reach.

This issue has been said to currently be under review and guidelines specific to this issue would be published in the near future.