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Valuation of Alternative Assets - Private Debt, Equity & Real Estate 2 Valuation Risk Reviewhandbook | FALL 2017 FALL 2017 | Valuation Risk Review 3 Voltaire FALL 2017 | ISSUE 3 ADVISORS VALUATION RISK REVIEW Valuation of Alternative Assets - Private Debt, Equity & Real Estate 2 Valuation Risk HandbookReview | FALL 2017 FALL 2017 | Valuation Risk Review 3 INTRODUCTION INTRODUCTION The New Certificate in Entity Welcome to the third edition of our Valuation Risk Review. Issue #2 last and Intangible Valuations | summer looked at valuation issues facing US mutual funds. In this release American Society of Appraisers we review some of the valuation challenges relating to alternative assets Valuing Fund Interests of Increasing – private equity, debt and real estate. Future issues will zero in on other Concern? | Du & Phelps major user segments, such as hedge funds, and also cover dierent asset Portfolio Valuation and Regulatory Scrutiny | Mercer Capital classes, so keep an eye open for forthcoming releases. PRIVATE EQUITY Panel Discussion | BDO, Du The valuation of alternative assets such as private equity, debt and real & Phelps, Empire Valuation Consultants, KPMG, estate is coming under heightened scrutiny by regulators and investors Private Equity International as the asset class becomes more widely held. With ‘Mr & Mrs 401(k)’ increasingly exposed to investments of this kind via their mutual and Gifting Carried Interests: Valuation & Planning Pitfalls - Experience pension funds, the requirement for more consistent and transparent from the Trenches | Empire valuations is growing. Valuation Consultants CONTENTS Consistent & Transparent Valuation Until recently, guidance on the We believe that this segment of of ‘Unicorns’ | Voltaire Advisors valuation of such assets was the industry will experience a limited. However, SEC-inspired significant transformation over PRIVATE DEBT industry initiatives are underway the next few years. Alternative Panel Discussion | BDO, Du to formalize the process, with a assets will become increasingly & Phelps, Empire Valuation new accreditation (the CEIV) and mainstream, and as a result the Consultants, KPMG, Voltaire associated set of standards. Our valuation standards to which Advisors first articles in this edition look investment managers will be held The Rise of Private Debt | more closely at these eorts and are likely to be ever more stringent. IHS Markit their rationale. We will be following these trends closely on behalf of our clients. Key Regulatory Issues in the Subsequent sections kick-o with Loan Market and Prospects the proceedings of a series of for Reform | LSTA panels Voltaire Advisors hosted on Sourcing and Utilizing Market Data Private Equity, Debt and Real Estate for The Valuation of Middle Market valuations at a Breakfast Briefing and Illiquid Loans | AdvantageData in February of this year. These Special Pricing Challenges of are followed by more detailed Ian Blance Editor Lower Quality, Private and Illiquid Securities | Murray Devine expert comment from industry practitioners on some of the more noteworthy issues in each field. REAL ESTATE Panel Discussion | CBRE, Du & Phelps, Empire Valuation Consultants, RICS The RICS Red Book: A Risk Management Framework for all Asset Valuation Work | RICS Back Oce Challenges for a Real Estate Fund CFO | AltaReturn 4 Valuation Risk Review | FALL 2017 FALL 2017 | Valuation Risk Review 5 Who is it for? ASA Certified CEIV Professionals The Certified in Entity and Intangible ASA is solely focused on valuation. ASA is also The New Certificate in Entity Valuations™ (CEIV™) credential is intended a leader in financial reporting and fair value and Intangible Valuations for professionals who perform fair value education, and it is the only organization that measurements for public and private company oers a specialty designation for intangible financial statement reporting purposes. assets. ASA also oers regional fair value This includes estimating the fair values of conferences, webinars, and a specialized fair business interests, intangible assets for track at the organization’s national conference. purchase price allocation requirements, and for To maintain the CEIV credential, there is an By William A. Johnston, ASA, Chair of the Business impairment testing purposes. The credential is ongoing education requirement, and ASA is a Valuation Committee, American Society of Appraisers oered to members and prospective members leader in providing that type of education. of ASA, AICPA, and RICS who work in the fair William A. Johnston, ASA, is the Business value arena. Valuation Committee chair for the American Society of Appraisers and Managing Director for Empire Valuation Consultants. Mr. Johnston Why is the CEIV Certification Important? How Does the CEIV Credential Benefit Financial Entities or Advisors? may be reached at [email protected] or +1- During the last 15 years, the global accounting model has increasingly gravitated toward the use 212-714-2824. By obtaining the CEIV credential, professionals of fair value as the basis for measuring the financial statement values of assets and liabilities. performing fair value measurements The trademarks CEIV and CERTIFIED IN There has also been an increased desire globally by investors for better, more current fair value demonstrate their commitment to enhancing ENTITY AND INTANGIBLE VALUATIONS are estimates for a fund’s investments. Estimating fair value measurements often involves the use audit quality and consistency and transparency owned by Corporate and Intangibles Valuation of sophisticated financial models, various valuation approaches and analytical assumptions and in fair value measurements. Credential Organization, LLC, and are used under license professional judgment. holders must comply with a newly established agreements between Corporate and Intangibles Public statements by U.S. capital market performance framework and are subject to Valuation Organization, LLC and RICS, ASA and regulators have called into question whether an ongoing quality control process, ensuring AICPA. some of the individuals conducting fair value confidence in the consistency and transparency measurement estimates have the requisite in their work, all to the benefit of the public training, qualifications, experience and expertise interest and the financial companies and to perform this type of work. These regulators advisors servicing them. also question whether individuals conducting these estimates are subject to a consistent set of professional, technical and ethical standards. To address regulator concerns and protect the public interest on a global scale, the American Society of Appraisers (ASA), the American Institute of Certified Public Accountants (AICPA) and Royal Institution of Chartered Surveyors (RICS) have championed the co- development of a financial reporting credential to demonstrate member competency and accountability. This eort is another example of the profession’s ability to collaboratively and proactively respond to market needs. 6 Valuation Risk Review | FALL 2017 FALL 2017 | Valuation Risk Review 7 investment valuations through the use of a impacts on investment decisions. qualified experienced third-party valuation The regulatory world continues to aect the Valuing fund interests expert. Absent the ability to show that, limited world of fair value determination as well. From partners must have their own robust process at the European Union’s Alternative Investment of increasing concern? the asset level. Fund Managers Directive making a clear push Related to fair values for financial reporting for independence in the valuation process to is the fact that LPs are becoming more Brazil’s enacting fair value rules for the first time sophisticated in the criteria used to manage (and requiring public disclosure of fair values by their investment portfolios — both existing and investment), regulators have taken notice of the By Chris Franzek & David Larsen, new investments. Fair value is the only objective importance of fair value to all constituents. 2016 Du & Phelps measure to compare dissimilar investments saw the Securities and Exchange Commission on each measurement date. Robust fair values and European regulators fine several funds enable LPs to make well-informed decisions for poor valuation practices despite valuation around performance and asset allocation. not being at the top of the published list of Advancements in technology are making it examination priorities. increasingly easy for even smaller, resource Asset valuation processes for funds continue to be a prominent topic of discussion despite no The American Institute of CPAs is working on constrained LPs to look at their portfolio’s major revisions in the past five years to FASB ASC 820 or IFRS 13, the two accounting rules a new guide for the valuation of private equity makeup and performance in ways they couldn’t defining fair value for fund financial reporting purposes. GASB Statement 72, issued in early investments that is due out in draft form in even a few years ago. When an LP sees a 2015, mirrors the definition of fair value used by the Financial Accounting Standards Board early 2018. The AICPA guide is expected to fund’s NAV or the fair value of an underlying and the International Accounting Standards Board and highlighted that investors in funds be rich in examples that demonstrate proper investment remain constant for a number cannot blindly accept net asset value as the fair value estimate. In addition, investors’ focus on valuation methodologies as well as the need for of periods, it is increasingly being seen as a fair value includes obtaining transparency, evolving industry best practices
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