BDCs are increasingly mandating the use of valuation firms to obtain independent valuations for the complex or hard-to-value securities in their portfolio. As new BDCs form and existing BDCs grow, both boards of directors and partners have questions about the process. Following are excerpts from a conversation with Valuation Research Corporation’s John Czapla, Parag Patel and Shane Newell about best practices in BDC portfolio valuation.
Q: How does your typical valuation process for a BDC portfolio work?
The process begins at a high level as we seek to understand the scope of investments, including the investment selection process and the nature of the fund’s portfolio investments. Once we understand the investment thesis and portfolio, VRC focuses on their valuation process.
Q: When you drill down to the actual valuation process, how does it vary for different industries?
VRC has valued securities in many industries and we perform over 2,000 valuations each year. While the process is similar, the specific models and inputs can deviate among industries. Depending on what drives value, we determine which multiples and metrics should be used.
Q: Do you find clients have misperceptions about a third-party valuation process?
We generally provide valuations for financial reporting and understand that the fair market value requires deep knowledge and data about the company’s market. This is where a third-party firm differs from a fund’s internal valuations. Our audience is the BDC’s investors and board, making an unbiased determination of current fair value extremely important.