Reporting: Getting a fair view on fair value

If determining the 'fair value' of a private equity asset has always been a complex concept, it has been exacerbated by the volatility of the markets.

The limited number of recent deals has made it difficult to compile a dataset of comparable transactions. Meanwhile, changing conditions in the market are having a more direct - and at times dire - impact on the projections of maintainable earnings.

In September last year, the International Private Equity Valuation Board (IPEV) published updated guidelines, perhaps as a direct result of the inadequacy of previous valuation guidelines - highlighted during the crisis. These updated guidelines provided useful clarifications, for example, on the use of distressed market transaction data. IPEV has also eliminated the requirement to apply a marketability discount, and the one-year cut-off period applied to observed prices from recent investments. This will allow for more qualitative analyses based on facts and circumstances. Of course, to make sense and achieve IPEV's goals, these changes demand valuers make the necessary analytical effort.

Additionally, LPs have given much closer scrutiny to quality and frequency of the reporting provided by GPs since the onset of the crisis.

"Currently, the time it takes GPs to report is inconsistent across the industry, and can range from one to three months", said William Gilmore, private equity investment manager at Scottish Widows Investment Partnership, during a recent industry event in London. He continued: "There are always trade-offs [made] on reporting, but if some GPs can manage to report more frequently, what is preventing others from being on par?"

Overall, LPs believe better managers can be consistent and systematic about analysing their data and reporting on it. Nevertheless, when looking to make new commitments, the speed at which reports are generated ranks perhaps lower than investment strategy, back-office and track record.

Going forward though, the general notion is that GPs will have to spend more time and resources on improving reporting. Part of the solution may be technological. "Some of the biggest private equity houses are upgrading and updating their software in order to improve reporting to LPs," said Sarah Fromson, head of investment risk & performance at the Wellcome Trust.

In any case, quality and frequency of reporting are set to be among LPs' top priorities for the upcoming fundraising wave. The crisis may have caused havoc across the financial world, but it has also brought much needed improvements - reporting is just one of them.

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