On 27 March 2020, the International Private Equity and Venture Capital Valuation (IPEV) Guidelines Board issued special valuation guidance to assist managers who are applying the IPEV Valuation Guidelines to their 31 March 2020 portfolios.
The Guidelines were last updated in 2018 and are the prevailing framework for fair value information in the PE/VC industry. The special valuation guidance reinforces key valuation principles in order to ensure the robustness of information making its way to investors and other stakeholders; in the current global crisis it is vitally important that that information continues to flow in a timely and consistent manner.
What are the key points?
From a high-level perspective, the Board reiterates:
- The Guidelines should continue to be applied consistently, following existing valuation processes
- Fair value, as ever, represents the amount that would be received to sell an asset in an orderly transaction between market participants at the measurement date; market participant assumptions in the current market environment should be taken into account – fair value is not a ‘fire sale’ price
- Market participant assumptions may be laden with uncertainty, ultimately driving lower asset values
- Price of recent investments was encouraged to be supplemented with alternative valuation techniques in the 2018 update to the Guidelines – this is even more relevant now since those recent transaction prices are no longer reliable indicators of fair value
- Reflecting accounting standards (GAAP) guidance, fair value relies on known and knowable information on the measurement date
- Government support may impact a portfolio company, but only once that impact is known and can be reliably measured
- Valuation inputs to techniques should not double count features that impact performance, for example adjusting both expected future cash flows as well as the discount rate on a discounted cash flow forecast.
Guidance for specific types of investment
Actively traded securities should continue to establish fair value using the quoted price, acknowledging the current significant global market volatility.
In valuing a portfolio company, fund managers must assess a wide range of factors, such as:
- The impact the crisis has on revenue, customers, supply chain, productivity and employees
- The need to revise performance projections from Q1 2020 onwards, and prepare adjustable scenario plans
- Ensuring valuation inputs reflect the current market environment, risks and uncertainties
- Ensuring multiples and metrics are aligned
- Evaluating liquidity (working capital, debt facilities and cash flows) alongside scenario planning.
Without an actively traded price, the fair value of debt investments is based on a yield analysis, considering credit quality, coupon and term. Other points to note include:
- Par value or face value is not the automatic fair value equivalent, although it could be either of those or cost value
- Changes in credit quality should be assessed, considering also the difference between performing and non-performing debt
- Widening of credit spread affects various industries, credit ratings and terms.
Limited partnership (LP) interests:
The fair value of LP interests is initially the last reported net asset value (NAV), which is likely to be 31 December 2019 or 30 September 2019, adjusted for cash movements, movements in actively traded positions, and valuation changes in the underlying portfolio companies.
Estimating the most appropriate fair value of all investments in the current economic climate will be a challenge, but the special valuation guidance together with the Guidelines provide a sound base on which to make assessments and judgements.
How IQ-EQ can help?
At IQ-EQ, our fund administration teams have experience of the complex financial reporting required, as well as insights into the prevailing industry trends. So please don’t hesitate to contact me or reach out to your IQ-EQ relationship manager to discuss how the guidance can be tailored to your specific circumstances.