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Mercer Capital's Financial Reporting Valuation Flash | Q2 2013 | Portfolio Valuation Can Be Complex, Risky
Mercer Capital's Financial Reporting Valuation Flash | Q2 2013 | Portfolio Valuation Can Be Complex, Risky
Mercer Capital's Financial Reporting Valuation Flash | Q2 2013 | Portfolio Valuation Can Be Complex, Risky
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Mercer Capital's Financial Reporting Valuation Flash | Q2 2013 | Portfolio Valuation Can Be Complex, Risky

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A new issue of the Financial Reporting Valuation Flash has been released and is available in the Insights section of this website. …

A new issue of the Financial Reporting Valuation Flash has been released and is available in the Insights section of this website.

This issue contains the article “Portfolio Valuation Can Be Complex, Risky.” Quoting from the article:

Valuation of PE portfolio investments for financial reporting can be challenging for many reasons. PE investments are, by nature, illiquid. Portfolio companies are not publicly traded, and holding periods are generally long. PE investments often employ complex capital structures that include several tranches of equity, debt or hybrid securities with differing rights to intermediate and exit proceeds. In addition, derivative instruments are also popularly used in incenting management teams.

Mercer Capital has years of experience in providing third-party valuation opinions on illiquid investments to PE clients’ and other stakeholders’ satisfaction. Our recent presentation, “Best Practices for Fair Value Measurement,” throws some light upon a number of valuation issues specific to PE portfolios.

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  • 1. Mercer Capital’s Second Quarter 2013 Portfolio Valuation Can Be Complex, Risky Fair Value Measurement for PE Firms is Under the Microscope Valuation of PE portfolio investments for financial reporting can be challenging for many reasons. PE investments are, by nature, illiquid. Portfolio companies are not publicly traded, and holding periods are generally long. PE investments often employ complex capital structures that include several tranches of equity, debt or hybrid securities with differing rights to intermediate and exit proceeds. In addition, derivative instruments are also popularly used in incenting management teams. Increasing Risk of Conflict of Interest Market participants are increasingly sensitive to (the appearance of) conflicts of interest in PE valuations. In the absence of public, transparent information, investors have to rely on valuation marks provided by PE managers to assess performance, review allocations, determine compensation and fulfill their own reporting requirements. Regulatory agencies, including the SEC, are increasingly scrutinizing valuation practices within PE and other alternative investment managers. Mercer Capital Has the Technical Expertise to Address Complicated Valuation Issues In the absence of public price discovery, analysts must rely on or devise models to conduct valuations of portfolio companies and investments. At the same time, accounting principles prescribe maximizing the use of publicly observable inputs in the valuation models. A defensible valuation opinion needs to consider, conduct, and document a number of procedures including historical financial review, independent analysis of public guideline or comparable companies and private transactions, evaluation of acceptable and relevant income methods (capitalization or discounted cash flow), and tests for internal consistency. Mercer Capital has years of experience in providing third-party valuation opinions on illiquid investments to PE clients’ and other stakeholders’ satisfaction. Our recent presentation, “Best Practices for Fair Value Measurement,” available at http://mer.cr/pe-val-ppt, throws some light upon a number of valuation issues specific to PE portfolios. Financial Reporting Valuation Flash © 2013 Mercer Capital 1
  • 2. Mercer Capital’s Financial Reporting Valuation Flash Second Quarter 2013 © 2013 Mercer Capital 2 Hiring an Independent Third-Party Valuation Specialist Reduces Risk of Conflict of Interest It is vital that analysts exercise impartiality in conducting portfolio valuations. Larger PE funds increasingly rely on valuations prepared by third-party specialists to ensure objective reporting of portfolio investments. Investor-facing groups including the Institutional Limited Partner Association, European Private Equity and Venture Capital Association, and the Alternative Investment Management Association acknowledge and recommend the use of independent third-party valuation specialists. Contact a Mercer Capital professional to discuss your needs for independent valuation and consulting services. Topics in this presentation include: “International Private Equity and Venture Capital Valuation Guidelines,” “CFA Institute Global Investment Performance Standards,” and “Key Takeaways.” Click the image to view the presentation. Mercer Capital provides portfolio valuation services for a variety of sophisticated asset managers including private equity groups, hedge funds, business development companies, and insurance companies. Mercer Capital’s services for fund managers, boards of directors, audit committees, and fund administrators include: • Review of valuations prepared by PE managers • Positive assurance opinions • Full appraisals of portfolio companies • Solvency opinions • Fairness opinions Related Resource Best Practices: Fair Value Measurement for Firms Subject to the Investment Company Act of 1940 Mercer Capital’s Portfolio Valuation Services
  • 3. Mercer Capital Copyright © 2013 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media quotations with source attribution are encouraged. Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Financial Reporting Valuation Flash is published quarterly and does not constitute legal or financial consulting advice. It is offered as an information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list to receive this complimentary publication, visit our web site at www.mercercapital.com. Contact Us Travis W. Harms, CFA, CPA/ABV 901.322.9760 harmst@mercercapital.com Matthew R. Crow, ASA, CFA 901.685.2120 crowm@mercercapital.com Lucas M. Parris, CFA 901.322.9784 parrisl@mercercapital.com Sujan Rajbhandary, CFA 901.322.9749 sujanr@mercercapital.com Whitney L. Faust 901.322.9741 faustw@mercercapital.com Mercer Capital 5100 Poplar Avenue, Suite 2600 Memphis, Tennessee 38137 901.685.2120 (P) www.mercercapital.com In an environment of increasingly complex fair value reporting standards and burgeoning regulatory scrutiny, Mercer Capital helps clients resolve fair value reporting issues successfully. We have the capability to serve the full range of fair value valuation needs, providing valuation opinions that satisfy the scrutiny of auditors, the SEC, and other regulatory bodies. We also have broad experience with fair value issues related to public and private companies, financial institutions, private equity firms, start-up enterprises, and other closely held businesses. National audit firms consistently refer financial reporting valuation assignments to Mercer Capital. Our professionals are nationally recognized as leaders in the valuation industry, and hold the most rigorous credentialing designations including the CFA, ASA, and CPA, among others, which are representative of the highest standards in the valuation and accounting industries. Mercer Capital has the institutional capability to tackle even the most uncommon or complex fair value issues. We understand the sensitivity of financial reporting timing needs and meet your deadline on time, every time. Financial Reporting Valuation Services

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