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AIFMD & Valuation - AIM Breakfast Briefing

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AIFMD & Valuation - AIM Breakfast Briefing

  1. 1. AIFMD and valuation April 2015 www.pwc.ie
  2. 2. PwC Valuation, so post crisis what has changed? 1) How valuations are managed and approached 2) Investors demanding greater transparency 3) Increased industry regulation and AIFMD 2 April 2015
  3. 3. PwC Formalised policies and procedures The fundamental building blocks to best practice around valuation are • Written policies • Segregation of the Investment management and valuation functions • Clear disclosure of any involvement of the Investment manager in the production of the NAV • Detailed policies on price sources, valuation methods, illiquid positions and use of side pockets • Proper Documentation • Governance and escalation process • Disclosure and consistency of approach 3 April 2015
  4. 4. PwC AIFMD Requirements Level 1, Article 19 requirements • Appropriate and consistent procedures for proper and independent valuation for each AIF • Rules to value assets and calculate the NAV shall be laid down in the law of the country in which the AIF is domiciled • AIFM is legally responsible for proper valuation and calculation of the NAV. AIFMs shall also ensure that the net asset value per unit or share of AIFs is calculated and disclosed to the Investors Valuation function performed by • An external valuer, or • The AIFM itself • AIFM’s liability to the AIF or its investors is not affected by appointing an external valuer. 4 April 2015
  5. 5. PwC Use of an External Valuer • AIFM must notify the competent authority of the appointment of an external valuer • The external valuer • Subject to mandatory professional registration • Provides professional guarantees (article 73 guidance) • Can’t delegate to a third party • valuation shall be performed impartially and with all due skill, care and diligence. 5 April 2015
  6. 6. PwC AIFM responsible for valuation • Competent authority may require the AIFM to have its policies and procedures verified by an external valuer. • The valuation function must be independent from the portfolio management, and • the remuneration policy and other measures ensure that conflicts of interest are mitigated and that undue influence upon the employees is prevented. 6 April 2015
  7. 7. PwC Regulation 67 – policies and procedures AIFMs shall establish, maintain, implement and review, for each AIF they manage, written policies and procedures that ensure a sound, transparent, comprehensive and appropriately documented valuation process. The valuation policy and procedures shall cover all material aspects of the valuation process and valuation procedures and controls in respect of the relevant AIF. The valuation policies and procedures shall address at least the following: (a) the competence and independence of personnel who are effectively carrying out the valuation of assets; (b) the specific investment strategies of the AIF and the assets the AIF might invest in; 7 April 2015
  8. 8. PwC Article 67 – policies and procedures (c) the controls over the selection of valuation inputs, sources and methodologies; (d) the escalation channels for resolving differences in values for assets; (e) the valuation of any adjustments related to the size and liquidity of positions, or to changes in the market conditions, as appropriate; (f) the appropriate time for closing the books for valuation purposes; (g) the appropriate frequency for valuing assets. 8 April 2015
  9. 9. PwC Article 108 – side pockets 9 April 2015 With respect to side-pockets, it should be noted that, although Article 19 of AIFMD on valuation does not itself address the question of side- pockets, Regulation Article 108 requires the AIFM to “provide an overview of any special arrangements in place including whether they relate to side-pockets, gates or other similar arrangements, the valuation methodology applied to assets which are subject to such arrangements and how management and performance fees apply to these assets.”
  10. 10. PwC Article 68 – use of models • Appropriate documentation on the reason for using a model, the source of underlying data and the assumptions • Model must be validated before use • Model approved by senior management of the AIFM • Additional considerations if the AIFM is the valuer 10 April 2015
  11. 11. PwC Articles 69 and 70 ARTICLE 69: Consistent application of valuation policies and procedures • An AIFM shall ensure that the valuation policies and procedures and the designated valuation methodologies are applied consistently. ARTICLE 70: Periodic Review of valuation policies and procedures • Periodic reviews • How change should be effected • RM function 11 April 2015
  12. 12. PwC Article 71 – Review of individual Assets The valuation policies and procedures shall set out a review process for the individual values of assets, where a material risk of an inappropriate valuation exists, such as in the following cases: (a) the valuation is based on prices only available from a single counterparty or broker source; (b) the valuation is based on illiquid exchange prices; (c) the valuation is influenced by parties related to the AIFM; (d) the valuation is influenced by other entities that may have a financial interest in the AIF’s performance; (e) the valuation is based on prices supplied by the counterparty who originated an instrument, in particular where the originator is also financing the AIF’s position in the instrument; 12 April 2015
  13. 13. PwC Article 71 (f) the valuation is influenced by one or more individuals within the AIFM. The valuation policies and procedures shall describe the review process including sufficient and appropriate checks and controls on the reasonableness of individual values. Reasonableness shall be assessed in terms of the existence of an appropriate degree of objectivity. 13 April 2015
  14. 14. Thanks This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC firms help organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com © 2015 PricewaterhouseCoopers. All rights reserved. PwC refers to the Irish member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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