Surviving scrutiny: The importance of the valuation process for PE and hedge fund managers
June 24, 2016
PitchBook Dealmakers Column
As the demand for transparency rises for private equity and hedge funds, the spotlight has been turned toward valuation practices. There are a number of reasons why the valuation process has become important, and they are essential for any fund manager to understand.
“With the increased attention, a key consideration for asset managers is the probability of an SEC audit,” notes John Czapla, managing director and Portfolio Valuation Securities Group practice leader with Valuation Research Corporation. “A failure to comply may have a negative impact on the asset manager’s reputation.” An important component of the SEC review is valuation. Asset managers—private equity firms, hedge funds, business development companies—need to prepare accurate valuations of their investment holdings with proper valuation policies and procedures in place in order to withstand an SEC inquiry.
The attention around valuation isn’t solely stemming from enhanced SEC regulation. In the post-Bernie Madoff era, limited partners, boards of directors and auditors are also demanding enhanced governance and more transparent documentation when it comes to valuations, especially those of illiquid investments. In addition to the heightened caution caused by fraudulent structures, another key catalyst to enhanced governance and transparency is the record flow of capital into alternative investments.
To avoid unnecessary investor, auditor, or regulatory scrutiny around valuations, hedge funds and PE funds should follow several best practices to improve processes, increase transparency, and create accountability for valuation oversight.
Read the full VRC white paper, “Best Practices for Private Equity Sponsors in an Age of Increasing Scrutiny”: click here.
This article represents the views of the author only and does not necessarily represent the views of PitchBook.