EUROPE - IPEV reaffirms commitment to fair value

Fair value has become a hotly disputed topic in the current climate due its inherently subjective nature, with IPEV board member Anthony Cecil, head of private equity assurance at KPMG, describing it "an art and not a science." This issue is compounded by the lack of comparables in the current market, with 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." When asked about discrepancies with how the guidelines are implemented, Daems was keen to reiterate that IPEV is "not designed to be a policing group," with fellow board member David Larsen, managing director at Duff and Phelps, suggesting that "the pressure has to come from investors."

Indeed, throughout the session the board constantly reinforced the importance of these guidelines to LPs. In response to a question regarding how much worth fair value reporting has in the current climate, Cecil pointed out the useful function it can serve 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 said. 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 that remained outstanding from the conference was in relation to how fund-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 This inevitably means that the fund-of-fund itself is then reporting out of date information to its own investors and is therefore effectively not complying with fair value requirements.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.

The board stated that this issue was currently under review and guidelines specific to this issue would be published in the near future.

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