When the Private Equity Industry Guidelines Group revealed its highly anticipated valuation guidelines in December, it spawned a great deal of discussion, but little else.
In an effort to soothe qualms centered around paragraph 30 — the guideline for when general partners increase (write up) or decrease (write down) the value of a portfolio company before an additional round of financing — the authors of the guidelines have been circulating a clarification. The issue is touchy because it affects the returns on the private equity funds in which limited partners invest.
A goal of the guidelines is to use fair value as opposed to book value in reporting and therefore make private equity valuation reporting compliant with generally accepted accounting principles, said Kevin S. Delbridge, managing director of HarbourVest Partners LLC, Boston. PEIGG originally included the provisions because in order to be GAAP compliant, portfolio companies must be subject to write ups without a financing event, as well as write downs. However, both affect private equity fund returns.
The group, comprising private equity consultants, money managers and institutional limited partners, including the $166 billion California Public Employees' Retirement System, Sacramento, have included some examples for both seed or early stage companies and later-stage investments.
The industry has been reluctant to adopt the PEIGG guidelines, and 90% of that reluctance centers around paragraph 30, Mr. Delbridge said. Some general partners didn't want limited partners involved at all; others didn't think limited partners should be in a position to approve valuations because valuation should be up to general partners' discretion, Mr. Delbridge said.
"In late 2000, 2001 and even in 2002, there were a lot of overvalued portfolios because people did not write down quick enough," he said.