More Related Content Similar to Deloitte Fund Directors Valuation Conference march 2015 Similar to Deloitte Fund Directors Valuation Conference march 2015 (20) More from Thorsten Lederer 托尔斯滕 More from Thorsten Lederer 托尔斯滕 (20) 3. Legal Framework
© 2015 Deloitte Tax & Consulting 3
Fund’s directors: General framework of valuation chain
What are the source of requirements regarding valuation duties?
No existing specific
framework for valuation
outside 2013 Law for
AIFMs, merely
professional standards
Soft laws
Hard laws
• 2010 law
• 2007 law
• 2013 law
• 1915 law
• Civil Code
• ALFI: Code of conduct
• OECD: Principles of corporate governance
• AIMA: Guide to sound practices for hedge funds valuation
• IOSCO: Principles for valuation of hedge funds and
principles for valuation of collective investment schemes
• INREV guidelines
• RICS valuation - professional standards and valuer
registration scheme
• EVCA: Handbook of professional standards
• General principles of law and market practices…
4. © 2015 Deloitte Tax & Consulting 4
Fund’s directors: General framework of valuation chain
Outline of general duty relating to valuation
(Third-Party) Delegate
Fund’s Governing Body
Investor
• Valuations: Performs valuation
according to fund’s valuation
procedures and policies and report
to fund’s governing body
• Determines/approves fund’s proper
valuation procedures and policies
and make changes as needed
• Valuations: May appoint internal
committee or external (third-party)
delegate and ensure oversight
• Subscribe for fund’s units through
contractual arrangement
• Depending upon legal form, general
meeting appoints fund’s governing
body and acts as controlling body
• Valuations: Must be able to trust
valuation used for individual assets
and NAV
= Accountable to investors
(corporate mandate / salaried agent)
= Accountable to fund
(contractual basis)
« Obligation
de moyens »
= Non-contractual liability
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Fund’s directors: General framework of valuation chain
Outline of main valuation aspects for AIFs
Fund’s Governing Body AIFM
Investors
AIF
[SPVs]
Portfolio of
investments
Requirements:
• Applies reasonable care, skill and
diligence and acts honestly in the
best interest of investors
• Determines/approves AIF’s proper
valuation procedures and policies
• Oversees appropriateness and
implementation of valuation
procedures and policies by AIFM
• Ensures existence and respect of
escalation measures to tackle
valuation issues
• Liaises with auditors and experts to
obtain guidance
Additional duties for AIFM introduced
by 2013 Law, i.a.:
• Establishes and periodically reviews
appropriate and consistent valuation
procedures (asset class basis),
including escalation process
• Performs independent valuation
internally or delegates to an
independent external valuer
• Continuously monitors independent
external valuer
• Discloses to investors valuation and
NAV
Ultimately responsible towards
investors for proper valuation of
AIF’s assets
Responsible towards AIF/indirectly
towards investors for the proper valuation
of AIF’s assets
Delegation of valuation function does not shift liabilities
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Values for professional and proper behaviour
Understanding of valuation procedures and oversight on valuation chain
Valuation
Procedures
Due Diligence
Delegation
Approval
Oversight
• Determines/approves general valuation framework / policies
• Ensure appropriateness and implementation of valuation procedures and policies
• Day-to-day valuation to valuation experts:
Internal committees comprising valuation experts
External (third-party) delegate(s): third-party expert(s), AIFM (delegating or not to
independent external valuer(s))
• Carries out proper due diligence for selection of valuation experts, be it internal or
external
• Carries out proper and effective oversight on above valuation experts once appointed
and their proper implementation of valuation procedures and policies
• Ensures valuation policies and procedures defined at fund’s inception are adequate
throughout the lifecycle of the fund depending upon assets under management
• Reviews valuations and approve/endorse results
Lawsandindustryguidelinesremainquitebroadin
assessinghowthetomeetthisresponsibilityinpractice
Fund’s governing body to determine granularity
Fund’s governing body = Ultimately responsible towards fund’s investors
7. © 2015 Deloitte Tax & Consulting
Complexity of fund’s directors function
Illustrative director position
Fund 3
Non-regulated
Fund 2
AIF
Fund 1
Non-UCITS
(part II) fund
Structured
products
portfolios
Director
Sub-fund 1.1 Sub-fund 1.2
Hedge funds
portfolios
Real Estate Private Equity Private Debt
• Different type of funds
• Different investment strategies
• Complex investment structures
• High volumes (number of lines)
• Diversity of products, methodologies, etc.
Directors
face many
difficulties
1. Major valuation risks are properly identified
2. Sound valuation governance is implemented
3. Controls to mitigate identified risks are designed
4. Valuation oversight is exercised
5. Actions are taken for escalated issues
Directors
should
therefore
ensure…
7
8. 0
0 .5
1
1 .5
2
2 .5
3
3 .5
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Valuation Risks
Risk identification framework
Fund
Portfolio
Investment
Structuring
Valuation
Fund
Portfolio
InvestmentStructuring
Valuation
• Open-ended vs. close-ended
• Regulated vs. non-regulated
• Prospectus stipulations
• Investment strategy
• Portfolio concentration
• Direct vs. indirect
• Complexity of investment
structure
• Valuation model
• Availability and quality of inputs
• Level of subjectivity
• Nature of investment
• Liquidity
• Investment characteristics
Low High
Low High
Low High
Low High
Low High
Level Description
Risk Assessment
(illustrative)
Conclusion
(illustrative)
Regulated close-ended private equity fund (minority stakes)
Open-ended UCITS fund (listed equities)
Risk Scores (illustrative)
• Private equity fund: 4/5
• UCITS fund: 2/5
9. Valuation Function
Valuation
Committee
Senior
Management
Governance Framework
Oversight of the valuation Function
Board of Directors
Fund
Compliance Risk Investment Finance
• Independence vis-à-vis investments
• Members include:
o CFO, CRO, CCO
o Internal of external experts
• Establishes and enforce detailed
valuation policies and procedures
• Define information required to
exercise oversight
• Execute valuation
policies and procedures
• Implement controls
• Manage and supervise
valuation function
• Dictate general
valuation framework
• Oversight of valuation
function
• Responsible for
valuation results
• Valuation
comply with:
oprospectus
oLaws and
regulations
oPolicies and
procedures
• Contribute
information /
investment
knowledge
required by
the valuation
process
• Risks
identification
/ monitoring
• Check
Impact of
risks on
valuations
Direct reporting line
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11. © 2015 Deloitte Tax & Consulting 11
Conclusion
Directors responsibilities
To mitigate valuation risks, fund directors can rely on:
but…
…it is not possible to eliminate valuation risks
Valuation processes Valuation resources
…to face complex valuation cases, directors can…
→ Governance
→ Controls
→ Internal
→ providers
Receive training Seek assistance
Directors are responsible towards fund investors
Therefore…
To increase
valuation
knowledge and
capability to
detect issues
To obtain
external expert
valuation
opinions on
complex matters
…and promote enhanced investor disclosures
12. Fund Directors – Valuation and Related Risks
Panelists
Jérôme Alméras
Managing Partner, Cube Infrastructure Fund
Jason Howard
Director, EQT Services UK Ltd.
Cliff Langford
Owner, Real Estate Director Services S.à.r.l.
Ingrid Dubourdieu
Partner, D. Law
13. © 2015 Deloitte Tax & Consulting 13
Thank you for listening
If you have any questions or comments, please contact valuation@deloitte.lu
Key contacts
Pierre Masset
Partner – Corporate Finance Leader
+ 352 451 452 756
pmasset@deloitte.lu
Strategy & Corporate Finance
Joachim Heukmes
Director – Corporate Finance
+ 352 451 452 037
jheukmes@deloitte.lu
Strategy & Corporate Finance
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