Private Equity Compliance

CHAPTER 4Valuation Compliance

4.1 INTRODUCTION TO PRIVATE EQUITY VALUATION

The majority of investments made by private equity funds are into the securities of underlying portfolio companies. In many instances these securities can be considered to have low levels of liquidity or be considered to be illiquid. As we outlined in Chapter 1, liquidity refers to how easy it is to execute a transaction in a particular investment (i.e. its purchase or sale). The result of these low liquidity and illiquid investments is that there are often not readily available prices for these securities. This often results in a situation where a private equity manager must actively pursue third parties (i.e. a broker or valuation consultant) to provide a price, or for the General Partner (GP) to determine the price of the position itself (i.e. manager marked securities).

In either case, the GP typically maintains a great deal of flexibility with regard to the specific valuation of assets held by the fund. Whenever a fund manager maintains such authority over their own funds, a number of inherent potential conflicts of interest are present. In order to provide oversight of these conflicts, there are a number of compliance policies and procedures that are commonly in place.

4.2 INTRODUCTION TO PRIVATE EQUITY VALUATION

The starting point for examining the valuation approach used in determining the value of the fund's holdings is rooted in the fund formation documents, namely the private placement ...