Use of Independent Firms in Private Equity Fund Valuations

Accounting Standards Codication (ASC) 820 establishes a three-level hierarchy for fair value measurements, based on the observability of inputs used in the determination of fair values :

Level I: Quoted prices are available in active markets for identical assets as of the measurement date.

Level II: Pricing inputs, other than quoted prices in active markets, are either directly or indirectly observable as of the measurement date, and fair value is determined through the use of models or other valuation methodologies.

Level III: Pricing inputs are unobservable and there may be little, if any, market activity.

Pressure relating to valuations has grown for these rms for a number of reasons, including:

• More frequent fundraising cycles, requiring the presentation of interim performance data and IRR of “active” funds;
• continued focus on valuation practices in SEC examinations conducted by the Oce of Compliance Inspections and Examinations (OCIE);
• prevalence of sponsor-to-sponsor sales of portfolio companies, which can highlight the variance in valuations
• institutional investors continuing to have exposure to portfolio companies through more than one private equity rm, and seeking consistency across their various managers.

When engaging an independent valuation rm the following should be considered:

1. The scope of work should be clear and well understood
2. The level of agreed upon procedures should be documented
3. Review of valuation determinants

Private Equity Firm Valuation Services

Tier 3 Assets/Investments

Tier 3 level investments are related to assets whose fair value cannot be determined by using observable measures, such as market prices or models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges. ValueScope is experienced in working with auditors to help you overcome the ever-increasing financial audit hurdles.

Purchase Price Allocations

Understanding the applicable standards and regulations is key to navigating the maze of esoteric issues that arise from mergers, acquisitions and asset purchases. As specialists in fixed asset, financial, intangible and strategic asset valuation, we bring creativity, accuracy and support to a higher level.

Long Term Incentive Plans

With Section 409A and Section 83(B), portfolio companies are required to show that stock options are not being issued “in-the-money” or below fair market value. This also applies to Employee Stock Options under ASC 718. A formal valuation opinion is required every 12 months, or more often if there is a material change in either the business or the implied market value of the common stock.

Complex Derivatives

Complex derivatives require complex valuation tools, models, and approaches. Through the use of the Black-Scholes-Merton model, binomial option pricing models, or Monte Carlo analyses, we have the tools required to value these complex securities.

Undivided Interest Discounts

The detrimental economic characteristics of undivided interests permit the application of valuation discounts when estimating their values. We help companies maximize discounts for Federal Tax reporting purposes.