In-house valuation continues, even as experts emerge
INVESTMENT INDUSTRY INSIGHTS |
The Securities and Exchange Commission (SEC) recently announced that it would be focusing on issues surrounding valuation in its new examinations of alternative investment firms, and at the Sixth Annual RSM Investment Industry Summit, panelists agreed that in-house processes will continue to define the valuation space for some time to come.
"When I first started at Psilos, we had a room where every accounting document was kept in a large pile, and that was sort of the extent of our process,"said Joseph Riley, chief administrative officer, Psilos Group Managers, explaining the work it took to move to an internal valuation process. Many firms are still struggling with new requirements in relation to their policies and procedures approach to valuation. External firms have emerged to offer independent valuations of level 3 assets, although their role for each client can be different.
"Over time, we've built an in-house valuation method that brings in expertise across the firm. We just thought that made the most sense over outsourcing, because no one knows these companies better than we do,"Riley said.
"Getting buy-in on the valuation process can be difficult. International Private Equity Valuations (IPEV) only offers broad guidance, and investment professionals want to focus on investing. Business development companies (BDCs) really took the lead on this, and it falls off more in private firms, but setting up a valuation committee is really important. The SEC doesn't want deal teams making their own assessments alone," added John Czapla, Managing Director at Valuation Research Corp.
He explained that internal models might not be sufficient if they're too far afield from standard accounting and valuation methods. It's a red flag if the spreads within a model get too wide to be explained.
"The main thing is whatever model you choose, it's important to focus on the documentation, as well, and have both qualitative and quantitative information available around those numbers. Regulators are going to want you to show your work,"explained Kevin Vannucci, partner at RSM.
For further information, please contact Kevin Vannucci, partner RSM US LLP, 212.372.1295.