A U.S. industry group is poised to unveil long-awaited valuation guidelines that could move private equity investments to a fair value standard, which could reduce some firms' performance.
In interviews with Pensions & Investments, some industry insiders have given a sneak peek into what might be released:
-- Valuation is expected to be changed to fair value from the prevailing practice of using a portfolio company's cost until fund managers decide it has lost value, or until a new round of financing from other than the original venture capitalists indicates an increase in value.
-- Guidelines would eliminate the liquidity discount taken on the stock price when a private equity money manager takes a portfolio company public.
-- The distinction between venture capital and buyout funds might be scrapped in favor of a distinction that looks at whether the fund invests in companies that are in the early stages of development, or are more established.
The seminal work is being drafted by the Private Equity Industry Guidelines Group, formed at a conference two years ago to write voluntary valuation and reporting standards. The valuation portion is expected to be released in a few weeks.
"The biggest change would be fair value," said Rick Hayes, senior investment officer, who manages the alternative investment portfolio of the $154.7 billion California Public Employees' Retirement System, Sacramento. "The portfolios would reflect more of what's going on. (They) would reflect reality so we can look at different funds and have more of an apples-to-apples comparison."
"Essentially, we're moving toward more fair value and consistent calculations" of internal rates of return, he said.
Mr. Hayes is chairman of the Institutional Limited Partners Association, Toronto, which has commented on drafts of the guidelines. The National Venture Capital Association, Washington; the Association for Investment Management and Research, Charlottesville, Va.; and several international associations also have been involved.