The time when institutional investors could rely on their private equity managers' say-so on the valuation of their investments is just about over.
Proposals both by the Financial Accounting Standards Board and Department of Labor are making investors more responsible for ensuring that the values they get from their general partners are truly fair value. This is an issue for investors because consultants and accountants say that on average only about a third of private equity managers are reporting to investors at fair value.
On Nov. 1, FASB and the International Valuation Standards Council, which is charged with establishing international valuation standards, are scheduled to address potential changes to fair value.
Even managers that do value their portfolios at fair value use differing methods, which vary from discounting cash flows to finding comparable public companies. Club deals, transactions in which two or more private equity firms team up, raise issues especially when the firms use different methodologies.
FASB and DOL officials have reiterated informally that limited partners are responsible for the valuation estimates in their own financial statements, industry insiders say. FASB has continued to release proposals and advisories, while DOL officials are deciding whether additional regulations are necessary.
This means investors can't always use the numbers their general partners give them. “Limited partners cannot blindly use NAV (net asset value) as many did in the past,” said David Larsen, managing director and a leader of the corporate finance consulting practice for the San Francisco office of Duff & Phelps, a financial advisory and investment banking firm.
Proposed changes to FASB rules including rules affecting fair value estimates and disclosures of fair value are expected to be finalized in early 2011, said Mr. Larsen, who is a member of FASB's valuation resource group.