After a yearlong debate, an industry committee of private equity investors and investment managers last week released a set of valuation guidelines recommending a new process, but with a large loophole: Investment managers can keep the old method for "some period of time."
As expected, the Private Equity Industry Guidelines Group recommends switching to a fair-value method of valuing the companies purchased by the investment manager's portfolio. Currently, most are valued at cost or the value of the latest round of financing. The new guidelines recommend that investment managers switch to U.S. generally accepted accounting principles, or GAAP, which require private equity investments to be carried at "fair value."
The guidelines retain the subjective way of doing business in the private equity world. Fair-value methodology only kicks in when the investment manager determines that "subsequent events indicate a material change in value has occurred." What's more, managers may use cost valuation in the beginning of an investment and continue using it for an unspecified period of time.