Today, alternative asset managers are facing ever-increasing scrutiny from both investors and regulatory bodies. Investors are focused not only on returns, but also on the valuation governance practices of the funds in which they may invest. The emphasis on transparency of the valuation process, as well as heightened interest around internal controls, conflicts of interest, and general fund protocols, has increased the importance of funds having written valuation policies and procedures with a structure in place to monitor and enforce them. This document outlines the best practices in this area.

1. A Valuation Road Map
for Fund Executives
The Art and Science Explained
By Deirdre O’Connor, FCMA, CGMA and Cindy Ma, Ph.D., CFA

2. Opening Remarks 2
Valuation Governance 3
Internal Process Controls 8
Value Determination 9
Reporting and Documentation Process 18
Firm Resources 19
Concluding Remarks 20
Biographies 21

3. 2
OPENING REMARKS
Today, alternative asset managers are facing ever-increasing scrutiny from both investors and regulatory bodies.
Investors are focused not only on returns, but also on the valuation governance practices of the funds in which
they may invest. The emphasis on transparency of the valuation process, as well as heightened interest around
internal controls, conflicts of interest, and general fund protocols, has increased the importance of funds having
written valuation policies and procedures with a structure in place to monitor and enforce them.
Recent cases involving the Securities and Exchange Commission (SEC) and alternative investment managers
have put the spotlight on these issues. In a May 2016 article published by the Wall Street Journal, former
SEC enforcement director Andrew Ceresney was quoted as stating that the SEC was looking for “all types of
misconduct by hedge fund managers,” and that “valuation is one of the core issues.”
1
It is paramount that fund managers are transparent with the investment community. Managers must ensure
that valuation methodologies are consistently and fairly applied across their investments. After all, valuation is
considered an art and a science, and regulators want to see the science behind it.
It is in this context that we bring this procedural guide on effective valuation governance to the fund management
community. There have been other guides widely referenced by the investment community that have provided
parameters for a general framework.
2
However, our hope is that this guide will provide practical solutions that
bridge overarching principles with daily operating protocols in the areas of valuation governance, valuation
controls, valuation methodologies, and transparency on an institutional basis.
The valuation governance procedures discussed herein are intended to be used in conjunction with fair value
reporting requirements of investments in accordance with the applicable Accounting Standards Convention 820
(ASC 820) under U.S. generally accepted accounting principles (GAAP) or International Financial Reporting
Standards 13 (IFRS 13) under international accounting standards.
Deirdre O’Connor, FCMA, CGMA
Managing Director
Global Asset Management Firm
Cindy Ma, Ph.D., CFA
Managing Director
Global Head of Portfolio Valuation & Fund Advisory Services
Houlihan Lokey
1
Rob Copeland and Aruna Viswanatha, “Wall Street Cops to Hedge Funds: Treat Investors Better,” Wall Street Journal, May 9, 2016, accessed April 2017,
https://www.wsj.com/articles/hedge-funds-treatment-of-investors-gets-new-scrutiny-1462808155.
2
See, for example, Alternative Investment Management Association, Guide to Sound Practices For Hedge Fund Valuation, October 2013.
April 2017

4. 3
In the U.S., a majority of funds are set up as either partnerships or limited liability companies. A governing body (the
Governing Body) generally supervises the conduct of the fund’s affairs. Depending on a fund’s structure and jurisdiction,
the Governing Body may be a board of directors, general partner (GP), managing member, or trustee.
A Governing Body for the fund typically delegates authority to a valuation committee (the VC) to create and maintain
sound valuation policy and procedures (the Valuation Policy) and enforce segregation of duties.
In this framework, policies and procedures ensure consistent and unbiased application of valuation methodologies,
and provide support to maximize the utility of limited firm resources. Stakeholders (e.g., investors, regulators, and
auditors) expect a best-in-class comprehensive valuation process and robust governance procedures. As such, key
controls around the process should be documented, independently audited, and approved by senior fund management
personnel.
Given our collective experience with the preparation and implementation of valuation policies and procedures, we will
provide insights into these areas throughout this guide.
VALUATION GOVERNANCE
There should be a consistent process
for making the periodic independent fair
value determination for each security
based on the fair value hierarchy,
asset class, and investment type, in
compliance with policy.
There should be comprehensive reporting
and documentation transparency
protocols as they relate to internal process
controls, value determination, and
information provided to the Governing
Body for key decision making.
There should be
continuous enhancement
of firm resources, with
a focus on personnel,
technology, and third-
party valuation advisors.
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Transparency
Firm
Resources
The implementation of internal
process controls, including those
related to valuation, compliance,
and audit procedures, is a critical
component of the framework.

5. 4
Fund Manager Ecosystem
Components of Framework
Valuation Committee
Internal Audit &
Compliance Middle Office/Operations Functions
Accounting/Finance/
Independent Price Verification Group
Front-Office/Investment Team
Regardless of the fund structure, a sound governance framework is led by the Governing Body and
includes the following key components: (i) a formal VC, (ii) well-documented valuation policies and procedures,
and (iii) segregation of duties, whereby the ultimate investment valuation oversight should be independent from
the fund’s investment process.
Although the Governing Body is ultimately responsible for the fair
value hierarchy, current best practice is to (i) utilize an external
fund administrator who implements the hierarchy and (ii)
delegate oversight of the valuation process to the VC. Decisions
related to the valuation process and fair value hierarchy should
not be subject to undue influence by the front office and/or
those making investment decisions. Valuation responsibilities
fall within the middle office or accounting groups, and some
larger firms have created valuation teams within the accounting
groups. Middle Office/Operations generally prices the portfolio
daily in compliance with the Valuation Policy, and the
Accounting/Finance Group generally performs a full revaluation
monthly or quarterly for closed-end funds.
Valuation
Committee
Segregation of
Duties
Valuation
Policy
GOVERNING
BODY
(i) Valuation Committee
When the Governing Body delegates oversight of the valuation process to the VC, the VC may be structured
as a subcommittee of the Governing Body or a separate committee. The VC is one avenue used to mitigate
potential conflicts of interest that may occur when the investment manager is also the GP or managing member
of the fund. The VC typically has authority over the implementation of the fund’s Valuation Policy and should be
diligent in the exercise of its oversight duties.
The fund manager ecosystem typically requires collaboration across the following functions. As such, a sound
valuation framework needs to consider an efficient flow of information and interaction across these functions.

6. 5
From a fair value perspective, the VC is typically responsible for (i) reviewing valuation results and exceptions,
including month-end valuations; (ii) month-end findings of the independent price verification process, including
the documentation of subjective inputs, variances between internal and external conclusions, resolution of any
valuation challenges, and any reporting errors or policy exceptions; and (iii) changes to the established pricing
source hierarchy established by security type.
Ultimately, the VC is responsible for the fair value determination of each security, including illiquid and hard-to-
value securities. The diagram below outlines key characteristics of a best-in-class VC:
VC Meetings
Representation
Committee
Charter
• VC members typically include the Chief Financial Officer, Chief Operating Officer,
Chief Compliance Officer, Chief Legal Officer, and Valuation Controller.
• The VC should understand the totality of the fund’s business,
including the range and complexity of investments and contractual terms of
governing fund documents.
• Investment professionals may, and often do, contribute to the valuation of
Level 3 securities and participate in VC meetings to the extent their knowledge
and experience related to the investments will be beneficial to the VC; however, value
determination authority rests solely with the VC.
• Internal audit personnel will generally participate as observers in regularly scheduled
VC meetings, while external auditors should generally observe VC meetings twice a year.
• The VC should meet prior to the publication of the fund’s net asset value (NAV),
which is typically on a monthly or quarterly basis.
• Members of the VC should have sufficient time (e.g., at least 48 hours) to review the
materials to be discussed.
• Minutes should be taken by a designated member of the VC. All key control areas of the
valuation process should be discussed at the meeting and documented in the minutes,
including any exceptions to the Valuation Policy.
• In addition to the regular meetings, the VC should meet at least annually to review, test,
and approve changes to the Valuation Policy.
• A charter governing the VC should be established and maintained by the
compliance department.
• A quorum of the VC should be established and documented
at each VC meeting.
• Representation on the VC and procedures on how members are nominated
to the VC should be properly documented.

7. 6
(ii) Valuation Policy
Key elements of a sound Valuation Policy include
• Description of the role of each party in the valuation process, including who is responsible for
oversight of the policy
• Identification of valuation sources for each type of security expected to be held by the fund for daily
pricing where possible, and monthly verification
• An outline of the basis of classification of the various asset classes with the ASC 820 fair value hierarchy
• Description of the process and price observability for determining when securities should be placed
in side pockets
• Specification of the procedures for escalation or resolution of conflicts and exceptions
• An outline of the process and procedures for handling and documenting price overrides, including
a review of price overrides by the Price Verification Group (defined hereinafter)
• Listing of key controls relied upon
(iii) Segregation of Duties
The appropriate level of segregation of duties will vary across funds based on a number of factors, including the
nature of any related potential conflicts of interest (e.g., the use of performance-based fees tied to the value of
the portfolio) and the complexity and discretion inherent in the valuation process. However, the fund manager
should aim to develop a system that is capable of valuing the portfolio daily (where possible) and that leverages
high-quality vendors to generate independent fair value indications for portfolio securities.
In addition, to further enable the segregation of duties within the organization, it is prudent for the Governing
Body to establish an independent price verification group (the “Price Verification Group”). The Price Verification
Group may reside in either operations or controller functions, but should always be independent of the fund’s
investment professionals.
The other functions necessary are compliance, an external fund administrator, an internal audit team, and
middle office.

8. 7
PRICE VERIFICATION GROUP responsibilities should include:
The roles and responsibilities of each of the groups are described below.
• Ensuring appropriate documentation and VC
reporting is maintained and that decisions are
documented, discussed, and approved by the VC
• Reviewing price overrides and associated
documentation
• Monitoring the reporting and resolution of errors
and policy exceptions for the VC
• Conducting periodic due diligence on vendors
• Overseeing the collection of daily pricing data
• Opining on valuation methodology
• Assisting in the development of valuation/pricing
hierarchy and policy, which maps products to
approved pricing sources
• Revaluing the portfolio independently on a
regular basis (e.g., at the end of the month) in
accordance with the policy
COMPLIANCE should be
represented on the VC and
should test and assess
whether the valuation process
is in compliance with the fund’s
Valuation Policy document.
MIDDLE OFFICE should generally
oversee the process of obtaining
prices from vendors in
accordance with the policy
and monitor daily P&L
to ensure position-level
P&L is appropriate
given market movements.
Price Verification
Group
Compliance
Fund
Administrator
Middle
Office
Internal
Audit
INTERNAL AUDIT should perform
an independent audit of the valuation
governance process throughout the year,
including:
• Observing and participating in
each VC meeting
• Evaluating the quality of documentation
related to key controls, including
technology controls
• Assessing whether the fund’s Valuation
Policy was appropriately applied in the
valuation process
FUND ADMINISTRATOR
should obtain:
• Vendor prices in compliance
with investment manager-
prescribed pricing hierarchy
• Broker quotes directly
from brokers and leverage
them in accordance with
the policy
• Level 3 valuations from
independent, third-party
valuation advisors

9. 8
INTERNAL PROCESS CONTROLS
Consistency is a key element of a robust valuation governance process. Below is a framework for establishing
internal process controls that ensure both the process and the results are consistent and in accordance with
applicable accounting guidelines.
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources
Broker Quote
Process
• The broker quote aggregation process should be appropriately documented.
• Broker quote challenges should be documented, reason coded, and centrally stored.
• The VC report should include the number of quotes per source to assess market depth.
Vendor Due
Diligence
• Comprehensive market data vendor due diligence should be performed with best practice
mandates in mind.
• In-person due diligence is recommended.
Independent
Monthly Price
Verification
• Obtain independent prices from vendors for Level 1 & 2 securities and monitor variance.
• Obtain counterparty quotes for derivatives while vetting if the counterparty is also the
originator and if it is also financing the fund’s position.
• Broker quotes for hard-to-value assets should be obtained directly from the pricing source
independently of the investment professionals.
• All pricing sources must be documented, and methodologies for price derivation must be
transparent, supported, and approved.
• Variance to prices generated by the external fund administrator should be monitored.
Back-Testing
• A sample of investments should be back-tested periodically to ensure that, historically,
estimates of fair value are consistent with trading activity.
• The sample should be established by the VC, and technology should be leveraged to
screen the appropriate population based on materiality.
• Results should be reported to the VC.
• Back-testing is a particularly effective control for Level 2 & 3 securities to the extent
meaningful trade data is available.
Stale Pricing
• All prices should be checked periodically to ensure they are not stale.
• Tolerance for number of days stale should be established based on asset class-specific
market liquidity.
• Stale pricing policy, thresholds, documentation, and VC reporting should be instituted.
Conflicts of
Interest
• Conflicts of interest in the valuation process are typically best managed by the
appointment of an independent and competent third-party valuation advisor.
• If the investment manager is responsible for valuation and/or governance, robust controls
over conflicts of interest should be established.
Escalation Process
• A process should be established for escalation and reporting to VC with regard to:
deviations from the Valuation Policy, gaps in available pricing sources over time, changes
in methodology by investment type, price overrides, and identified errors.
P&L Report
• Reported values impacting the P&L should be reviewed for consistency with current
market conditions (e.g., immaterial P&L movement in a volatile market environment).

10. 9
VALUE DETERMINATION
ASC 820 and IFRS 13 both establish a three-level fair value hierarchy to classify fund investments. Increased
regulatory scrutiny has resulted in an emphasis on the reliability of available pricing data as part of the hierarchy
determination process. The fair value hierarchy decision process should be dynamic and reflective of the current
market environment. Particularly in dislocated market conditions, it is not uncommon for securities to shift in
level classification.
Attributes of each level of the fair value hierarchy are as follows:
Level
1
Level
2
Level
3
• Unadjusted quoted prices in active markets for identical assets
and liabilities
• Quoted prices for similar assets/liabilities in active markets
• Quoted prices for identical or similar assets/liabilities in markets that
are not active
• The use of inputs (other than Level 1 inputs) that are directly or
indirectly observable
• Unobservable inputs, which represent the entity’s own subjective
determinations regarding inputs and assumptions that market
participants would use in valuing the subject security
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources

11. 10
Decision-Making Process
The chart below outlines questions fund management should ask when developing a valuation process, including
when it may be appropriate to partner with a third-party valuation advisor:
LEVEL3LEVEL1LEVEL2
YES
YES
NO
NO
Are observable
pricing data and/or
inputs available?
Is the security
deemed to be
actively traded?
Does your firm
have an internal
valuation group
that can perform
and document the
valuation?
Use vendor pricing
if the quality of vendor
quotes is appropriate Assess quality of
quotes (e.g., bid/ask
spread, position size,
number of quotes,
liquidity score, etc.)
Document
subjective decisions,
including rejection of or
challenging of quotes
Collect broker
quotes using
controlled, transparent
process independent
from investment team
Consider partnering with a
third-party valuation advisor
for positive assurance
(confirming reasonableness
of internal valuation)
Consider partnering with a
third-party valuation advisor for an
independent valuation to obtain a
fully outsourced range of value
Any widely accepted,
non-proprietary model
utilized must use
observable inputs and
be independently
tested
Use public price
with no adjustments
Partner with a third-
party valuation advisor
to assist in providing
comfort around pricing
(as applicable)
YES
NO
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources

12. 11
Valuation Process for Level 1 & 2 Securities
As part of the process to categorize securities as Level 1 or 2, a fund should consider instituting the
following protocols:
Use of
Pricing
Hierarchy
Use of
Independent
Vendors
Use of
Valuation
Models
Security
Common
Stock
Corporate
Bonds
Fair Value Primary Other Multi-Vendor Price Methodology per Primary Pricing Source
Hierarchy Source Sources Tolerance
Level 1 Reuters Bloomberg 1.001%
Level 2 Broker IDC 2%
quote Reuters
Markit
Bloomberg
• Last traded price on T (i.e., the valuation date)
• If last traded price on T is unavailable, take bid
price on T if long or ask price on T if short
• If no bid/ask price on T is available, take last
traded price within T-5
• If no last traded price within T-5, take bid price
within T-5 if long or ask price within T-5 if short
• If no traded price or bid/ask within T-5, alert for
stale pricing review
Sample line items from a pricing hierarchy for illustrative purposes are as follows:
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources
• A hierarchy should be established for each asset class. The hierarchy should state the
relevant priority valuation sources approved by the VC.
• The hierarchy should specify valuation variance tolerance by asset class based on the
fund manager’s value compared to any valuation provided by the Price Verification Group.
Tolerance should be reviewed at least annually by the VC.
• Quality of vendor quotes should be continually assessed.
• Quality or liquidity score should be understood and assessed.
• The fund should perform comprehensive testing, back-testing, and ongoing due diligence
of market pricing data for each asset class and vendor.
• Price cleansing performed by independent vendors is an important control for handling
perceived outliers in the data. The VC should have a clear understanding of the price
cleansing process used by each vendor in order to have confidence in the data.
• If valuation models are used, the Valuation Policy should specify the following:
• The approvals needed to use a valuation model, properly justified by appropriate
testing.
• The process to approve valuation models based on back-testing and documentation.
• Monitoring and verification procedures for model-based values against observed
market prices if available.
• A process that outlines the governance mechanism for manual overrides of model
inputs or results, including approvals obtained, documentation prepared, and
evidence of reporting to the fund’s Governing Body or its VC.
• If valuation models or any other valuation methods are not based solely on market quotes
for actively traded securities, the VC’s review should include engaging a third-party
valuation advisor to review a selected sample of valuation models and testing the results
against the available current market color.
• Mean of bid/ask on T
• If bid/ask on T is unavailable, take last traded
price within T-5
• If no traded price within T-5, take mean of bid
ask within T-5

13. 12
Valuation and Documentation for Level 2 Securities
Broker quotes may be considered when valuing the less liquid portion of a fund’s portfolio. The chart below outlines
a framework for the collection, assessment, and selection of data in connection with a fair value process for Level 2
securities, along with a process to handle valuation challenges when there are disagreements among the parties.
COLLECTION SELECTIONASSESSMENT CHALLENGES
Develop and document
a process that is
controlled, transparent,
consistent, and
repeatable
Conduct review of the
process through the
Price Verification Group/
Accounting/Finance
Ensure the Price
Verification Group/
Accounting/Finance is
on the distribution list
used by the brokers who
send quotes, ensuring
independence from the
investment manager.
Evaluate use of parsing
technology for available
broker quotes and
market color.
Assess the quality of the
quote (e.g., the bid/ask
spread, position size,
etc.)
ASC 820 classification
largely depends on level
of price transparency.
VC should have a solid
and repeatable process
around price cleansing
(e.g., calculating average,
outliers, number of
quotes)
Document and receive
VC approval for the
process around using
external quotes (or a
combination of quotes).
Leverage technology
applications to effectively
manage the process
of sourcing vendor
and broker quotes to
ensure policies are in
compliance.
The VC should govern
the quote selection
process and require
reporting of trends (e.g.,
broker consistently
rejected, outlier prices
rejected, etc.)
Funds will need more
substantiation for
fair values as a result
of recent regulatory
developments, which
may require the
expertise of a third-party
valuation advisor
Maintain consistency
in use of brokers and
document any departure
from defined set of
brokers.
Investment professionals
may need to challenge
brokers in certain
situations. Key controls
around the process
should be required,
approved by the VC,
and documented
Develop polices to
govern when challenges
can be made and note
level of substantiation
required
Maintain governance
around the supporting
information provided
for the challenge
(e.g., proof of trades
at certain levels).
Challenges with
associated reason codes
and substantiation need
to be held centrally
and robust enough for
intense audit from various
stakeholders.
In the absence of
broker quotes, use of
alternative techniques
should be documented,
back-tested, and
approved by the VC.
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources

14. 13
Valuation and Documentation for Level 3 Securities
If a fund’s investments are highly illiquid, best practice suggests the use of a third-party valuation advisor to either
supplement or complement the fund’s internal valuation work. The documentation and internal controls related to
any illiquid, hard-to-value securities will assist in enhancing fair value reporting and determination of the fund’s net
asset value. The flow chart below outlines a summary of internal controls for Level 3 securities.
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources
Consider recent transactions involving
the same security or others within the
same portfolio company
Estimate weightings for each
methodology and document rationale
Document methodology and
all inputs with sound rationale
Select appropriate methodology
at each valuation date
(refer to next page)
Document level of, and rationale
behind, changes to inputs,
assumptions, and weightings
Select appropriate inputs for each
valuation methodology (e.g., discount
rate, multiples, etc.)
Prepare appropriate reporting
package with these elements
for the VC (refer to next section)
Document and communicate to VC any discounts
and/or subjective valuation parameters
Consider calibration of selected
inputs to the relevant transaction or
reference date (refer to next page)
Note the use of stale data
and when documents should
become available in the future
Confirm receipt of all
relevant legal documents
at underwriting
1
Confirm receipt and
maintenance of periodic
quantitative and qualitative
updates on the investment
3
Consider what is known or
knowable as of each valuation
date for incorporation into
the model
5
6
8
Compare inputs and assumptions for
consistency with historical results and
current market conditions
10
Evaluate the need for
valuation adjustments for
liquidity, credit risk, or
other asset-specific risk
11
12
13
14
15
16
Check all terms utilized in
valuation model against
governing documents
4
7
9
2

15. 14
Selection of Appropriate Methodology
In estimating the fair value of a Level 3 security, the first step generally involves deriving the business total
enterprise value of the subject company. There are three commonly accepted approaches to estimate enterprise
value: the market approach, the income approach, and the asset-based approach. Once the enterprise value has
been ascertained, the fair value of the subject security can be estimated using the valuation framework below.
Unobservable Inputs – Calibration
Given that the fair value estimation of a Level 3 security relies on the use of unobservable inputs, strong
emphasis is placed on the process employed to support these inputs. A key consideration to ensure consistent
development and use of these inputs is the process of calibration when possible.
Calibration refers to estimating the implied value of unobservable Level 3 inputs (e.g., discount rates or market
multiples) by equating the model value to the latest arm’s-length transaction involving the subject security.
Such transactions may include the primary market transaction or sales/purchases of the subject security in the
secondary market.
Business Total Enterprise Value
Market Approach Income Approach Asset-Based Approach
Debt
Non-Performing
Net
Recovery
Approach
Option
Pricing
Model
Waterfall
Approach
Waterfall
Approach
Liquidation
Analysis
Equity
Allocation
Model
Yield
Analysis
Yield
Analysis
Warrants/OptionsPerforming
Common and
Preferred Equity
Equity
Reference
Date
Valuation
Date
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources
SECURITYLEVELANALYSISENTERPRISELEVELANALYSTS
• The calibration process begins by
estimating the value of the inputs
(e.g., discount rate or market
multiple) at the transaction date
based on the consideration paid
and the associated investment
metric at the time of the transaction
(e.g., projected cash flows
or trailing EBITDA).
• This estimation represents a
measurement of the return that a
market participant required in order
to make the investment as of the
reference date.
• At each subsequent valuation date,
adjustments to the implied inputs may
then be considered based on changes
in market factors (e.g., expansion
in spreads of selected guideline
indices or guideline public company
multiples) and issuer-specific factors
(e.g., decline in leverage or changes
in company outlook or performance).

16. 15
Level 3 Securities Typically Valued by a Third-Party Valuation Advisor
While Level 3 securities typically make up a smaller portion of a fund’s assets under management (relative
to Level 1 and 2 securities), discussions about Level 3 securities often consume a disproportionate amount
of time during a VC meeting.
Although third-party valuations have historically centered on Level 3 securities, asset managers are
increasingly using third-party valuation advisors to provide comfort around the fair value estimates of
Level 2 securities. In some situations, such a review may result in a reclassification of a Level 2 security
to a Level 3 security.
Listed below are certain types of securities typically valued by third-party valuation advisors.
• Private equity investments
• Preferred stock
• Leveraged loans
−− Subordinated mezzanine debt
−− Secured/unsecured debt
−− Unitranche/other
• PIPEs
• Real estate investments
• Joint venture investments
• Hybrid securities
• Non-performing loan pools
• Marketplace lending
• Mortgage servicing rights
• Equity derivatives
• Interest rate derivatives
• Credit derivatives
• Mortgage derivatives
• Commodity derivatives
• Currency derivatives
• Residential mortgage-backed securities
−− Agency, non-agency (subprime,
Alt-A, option ARMs, second liens,
and jumbos)
• Commercial mortgage-backed securities
• Asset-backed securities
−− Autos, credit cards,
student loans
• Collateralized debt obligations
(CDOs)
−− ABS CDO, CRE CDO,
trust preferred CDO
• Collateralized loan obligations
• Convertible bonds
• Stock options and warrants
• Revenue share agreements
• Litigation claims/rights
• Trade claims and bankruptcy claims
• GP minority equity stakes
• Carried Interest
• E&P/mineral rights
Typical
Illiquid
Securities
Corporate
Derivatives
Structured
Products
Bespoke
Products
Over-the-
Counter
Derivatives
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources

17. 16
Criteria for Selection of a Third-Party Valuation Advisor
When selecting a third-party valuation advisor, an investment manager should assess the breadth, depth, and
range of other services offered by the advisor in addition to their valuation credentials. Partnering with an
advisor that can deliver market-leading expertise throughout the lifecycle of investments (e.g., pre-transaction
diligence, post-acquisition monitoring, and monetization) creates meaningful efficiencies for the investment
management firm, not the least of which are time and cost savings. This type of partnership may also ensure
a deep understanding of each investment and generate value for the investment management firm, whether
it is in the context of valuation services, mergers and acquisitions, capital markets, financial restructuring,
transaction advisory, or strategic consulting.
In addition, both investors and investment managers can benefit from the added comfort in knowing that the
valuation advice and market color provided by the valuation advisor is best in class and that the advisor is
capable of handling esoteric valuation challenges.
Deliverable
• Will the deliverable include all
major input assumptions used to
generate the fair value?
• What is viewed to be an
acceptable range of values for a
valuation conclusion?
Conflicts of Interest
• How are possible conflicts of
interest managed?
• How is our confidential information
managed in the context of your
firm’s other service lines?
• How do you handle material,
nonpublic information from your
clients?
Breadth of Firm Offerings
• What is the total value of
investments valued by your firm?
• Does your firm understand the
nuances of the industries and
asset classes in which we invest?
• Does your firm have a capital
markets or corporate finance
group that provides real-time
insight into the market?
• Does your firm have both a
domestic and international
presence to meet our global
investment strategy?
• Does your firm have the capacity
to handle growth in our fund size
and number of investments?
Technical Experience
• What specific experience does
your firm have in evaluating the
types of securities we currently
hold as well as those in which we
may invest in the future?
• What is the depth and breadth
of the valuation inputs used
in deriving your valuation
conclusions?
• What are the specific internal or
external sources of information you
will be using?
Engagement Teams
• What is the rate of turnover among
the senior professionals?
• How involved are senior
professionals in the valuation
process? Will we have direct
access to the head of the
engagement team?
• Does senior management sign off
on the valuation?
• How does your firm staff its
engagement teams?
• What is the depth of the internal
and external resources you
will draw upon to perform our
valuations?
Key Questions to Ask Your Prospective Third-Party Valuation Advisor
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources
Ongoing Valuation Process Support
• What type of backup and
documentation will be provided for the
valuation conclusions?
• Is your firm willing to speak directly with
auditors in order to fully support the
valuations?
• What is the extent of your firm’s
experience interacting with auditors,
regulators, investors, administrators,
and other relevant parties?
• Would your firm defend the valuation
mark if challenged by regulators?

18. 17
Recent Trends with Level 3 Securities
Level 3 securities require comprehensive reporting, with important details on the valuation methodology (e.g.,
approach, weighting, etc.) included to ensure the VC has sufficient information to make key decisions. Changes
to methodologies or valuation sources and weightings should be highlighted and reviewed by the VC. Level 3
securities have become an important area of focus in the current regulatory environment, and we have noted
the following trends:
Valuation Policy and Procedures
Cost Savings to Funds and Efficiencies
Technology
Scope of Third-Party Valuation
Funds have recently begun a concerted effort to
review their existing Valuation Policy.
Such a review ensures that the policies and
procedures are up to date and reflect current fund
practices for pricing, cover all relevant asset classes/
strategies, and are consistent with the information laid
out in marketing materials and communications to
investors.
While funds are asked to produce significantly
more documentation related to hard-to-value
assets, they are also seeking to control their costs.
Auditors of hedge funds have begun to audit
a fund’s procedures and controls to reduce
the number of extensive reviews required on
individual assets. A robust control process can
reduce audit fees.
The use of technology as a tool in the valuation process
has grown, and growth is expected to continue.
However, it is important to note that technology is a
tool for modeling and making informed unobservable
input selections based on human expertise, and is not
a replacement for the diligent review and interpretation
of security agreements.
A third-party valuation advisor typically offers
limited-scope positive assurance and independent
valuation analysis. Recently, the trend has been
moving away from positive assurance and towards
independent analysis.
A limited-scope positive assurance is used to
assess the manager’s determination of fair value.
This typically results in a deliverable with a limited
level of supporting documentation.
An independent valuation analysis involves a full
valuation process by the third-party advisor and
typically includes a full narrative report with analytic
exhibits and accompanying support.
When considering a third-party valuation advisor,
the professional fees may be impacted by the
number of positions valued, frequency of review,
level of complexity, timing needs, and scope of
deliverable selected.
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources

19. 18
REPORTING AND DOCUMENTATION PROCESS
Internal Market Administrator Market Market Value
Value Value Variance
Level SEC TYPE Pricing Source Count Gross Net Gross Net Gross Net
1 Equities Bloomberg/Reuters 28 213,829,180.2 200,613,358.2 213,829,180.4 200,613,357.9 -0.2 0.3
2 Fixed Income Broker Quotes 3 59,694,839.0 56,479,017.0 59,694,839.4 56,479,016.9 -0.4 0.1
Name of Investment:_______________________________________________________________________________________________
Valuation Prepared by: _____________________________________________________________________________________________
Investment Performance: ___________________________________________________________________________________________
Valuation Methodology: ____________________________________________________________________________________________
• Why is it appropriate?__________________________________________________________________________________________
• Change from acquisition? _______________________________________________________________________________________
• Change from prior valuation? ____________________________________________________________________________________
Key Valuation Assumptions: _________________________________________________________________________________________
• Change from acquisition? _______________________________________________________________________________________
• Change from prior valuation? ____________________________________________________________________________________
• Were any discounts applied?____________________________________________________________________________________
Portfolio Company Information Rights:________________________________________________________________________________
• Unadjusted portfolio company information received and used:________________________________________________________
• Adjustments to portfolio company information made:________________________________________________________________
Level 1 & 2
Level 3
Fund Name Currency Total Value ($000) % Ownership
Illustrative Example: Fair Value Hierarchy Report
Valuation Committee Reporting Package
• Comprehensive, executive-level reporting packages
are required for the VC.
− A summary-level report should include all funds
and all products classified by its corresponding
fair value hierarchy (Level 1, 2, and 3 securities).
− Metrics should show gross and net market value
and variances in value reconciliations across
the securities.
• Each key control should have a summary report
included in the VC reporting package, highlighting
key areas.
• The meeting minutes must reflect that key controls
were discussed and if exceptions were raised.
• The fund needs to demonstrate that the VC is
receiving appropriate and sufficient information
so that it can review details and opine on key
decisions.
• The fund provides statistics on pricing vendor
coverage of Level 1, 2, and 3 securities.
Reporting of Errors & Violations
• Often, errors will occur and should be reported on a
timely basis. The VC is responsible for highlighting
detection, quantifying the monetary impact, and
identifying steps for remediation and prevention
going forward. Specifically, the VC will need to
− Assess the impact to the funds and investors
and determine whether investors should be
compensated.
− Identify changes to the Valuation Policy as
appropriate to avoid similar errors in the future.
− Revisit changes to materiality thresholds
identified within the Valuation Policy as
appropriate.
− Identify instances where the Valuation Policy
has been breached and prescribe resolution
procedures, including informing the Chief
Compliance Officer of the fund.
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources

20. 19
FIRM RESOURCES
To facilitate meeting each of these standards of proper valuation governance, the firm must be equipped with the
appropriate resources. Specifically, the use of the right technology and personnel within the firm must be considered.
Experienced professionals (both internal and external to the firm) with deep asset class expertise are needed
to perform the analytical procedures involved in the fair value determination process. Fund technology needs
to be an enabler of reliable data centralization and access for all functions within the fund, including financial
reporting, investor reporting, and portfolio management.
EXPERIENCED PEOPLE
• It is critical for funds to invest in the
right talent with deep expertise.
• Valuation governance can be
compromised when inexperienced
professionals are involved in or leading
various aspects of the processes
described herein.
• Middle-office/controller/valuation
professionals must be well qualified to
sign off on valuations.
• The valuation community has recently
taken steps to govern the quality of
valuations being performed by requiring
certain valuation professionals to hold
a Certified in Entity and Intangible
Valuation™ (CEIV) credential.
EXTERNAL DATA PROVIDER
• The collection of broker quotes is largely
manual across the industry, but parsing
technology has emerged recently that can
be leveraged.
• These technology solutions work as
standardized adapters into all leading
market data providers.
• Systems exist that have embedded pricing
rule designs for creating custom pricing
and valuation rules, can generate variance
reports, and automate reconciliation
of internal pricing with independent
administrator/third-party service providers.
External
Data
Provider
Experienced
People
Technology
V A L U AT I O N G O V E R N A N C E
Internal
Process
Controls
Value
Determination
Reporting &
Documentation
Firm
Resources
TECHNOLOGY
• Technology can provide critical
exception-level reporting, where
key issues/exceptions are targeted
efficiently and allow for expedited
resolution.
• Often, funds allocate spending to
manual processes, where they pay
• for data processors and receive very
little analytics in return.
• Well-designed and tested automated
solutions can be highly effective
from a data processing perspective.
• The process flow needs to be
reviewed to ensure it is robust
and well controlled.

21. 20
CONCLUDING REMARKS
Investors, regulators, and auditors will continue to focus on valuation-related issues given the publicity
surrounding alleged missteps at certain high-profile funds in recent years. There is no doubt that
the valuation process will continue to be challenging for investment management firms, especially
as those managers enter into new and more complex investments. However, it is important for
investment managers, fund CFOs, and other members of senior management to recognize their duty
to all stakeholders. In that respect, a well-executed valuation framework that includes appropriate
valuation policies and procedures, an adequate governance mechanism, effective use of technology,
and a competent team of internal valuation personnel supported by third-party valuation advisors
goes a long way in minimizing institutional risk. Although the use of external valuation expertise is not
a substitute for a sound valuation framework, incorporating such expertise can considerably improve
the efficacy of the valuation framework and assuage investor concerns related to the valuation of
fund investments.
Mary Jo White, a former Chair of the SEC, summed it up best in a keynote address to the Investment
Company Institute’s General Membership Meeting in May 2016:
“As portfolio strategies and permissible investments for a fund are being developed, it is essential that the
accurate pricing of the portfolio holdings and NAV calculations are carefully considered. It is also important
that the services used to assist funds with pricing do so accurately, in the manner disclosed in the fund’s
prospectus and consistent with the law. This is of high importance to everyone. I, along with your investors,
expect that you will get it right.”
3
3
White, Mary Jo. “The Future of Investment Company Regulation.” Speech, Keynote Address Investment Company Institute 2016 General Meeting, DC,
Washington, May 20, 2016.

22. 21
BIOGRAPHIES
Ms. O’Connor is a Managing Director at a global asset management firm and was previously a Managing Director
at Goldman Sachs, an Executive Director at Morgan Stanley, and a Vice President at J.P. Morgan. She has
deep expertise in the asset management industry and has held various roles including Global Head of Finance,
Controller for $150 billion multi-strategy funds, CFO for a private equity fund, North America Head of Credit,
Real Estate Controller, Global Head of Equity Derivatives, Director of Accounting, and Global Head of Valuation.
Ms. O’Connor is a Chartered Management Accountant with CIMA and GCMA and is a fellow at the Chartered
Institute of Management Accountants. Her board of directors experience includes The Women’s Bond Club,
Irish Repertory Theatre, Goal USA, and Women’s Initiative. Ms. O’Connor has been a senior advisor to the
New York Digital Irish Group and the Diaspora Irish Angels. She was named one of the Top 50 on Wall Street by
Irish America magazine for three years.
Ms. O’Connor is from Cobh, County Cork, Ireland, and studied Accounting at the Cork Institute of Technology.
Dr. Ma is a Managing Director and the Global Head of Portfolio Valuation & Fund Advisory Services at
Houlihan Lokey, focusing on illiquid and complex securities valuation. She has over 20 years of extensive
training, academic expertise, and hands-on experience in commodities, derivatives, securities, foreign
exchange, fixed incomes, structured transactions, hedging strategies, and risk management issues. Dr. Ma
has qualified and testified as an expert witness in U.S. District Court, U.S. Bankruptcy Court, and arbitration
and deposition proceedings. She has also worked as a consulting and testifying expert for the U.S. Securities
and Exchange Commission.
She is on the Standards Board of the International Valuation Standards Council (IVSC). She holds the
designation of Chartered Financial Analyst and is a senior fellow (FRICS) of the Royal Institute of Chartered
Surveyors. She obtained her CPA license (now inactive) in the State of Colorado.
Prior to Houlihan Lokey, she was a partner at Ernst & Young and directed a number of significant projects
related to derivatives valuation, commodities trading, hedging, and risk management. She also advised
the boards of directors of energy and financial companies on risk management, valuation, and corporate
governance issues. For over five years, she traded derivatives and designed new risk management products
for a global commodity firm. Dr. Ma served as an adjunct professor at Columbia University, where she taught
an MBA-level course in futures and options. She also developed several corporate training programs on the
complex aspects of capital markets.
Dr. Ma graduated from Columbia University’s Graduate School of Business with a Ph.D. in Finance and from
Indiana University with highest distinction with a B.S. in Accounting. Her Ph.D. thesis addressed energy
futures and options markets. She has published numerous articles on energy, derivatives, risk management,
valuation, and corporate governance, and she is a frequent speaker at industry conferences. She has also
co-authored a college textbook on futures and options.
Deirdre O’Connor, FCMA, CGMA
Managing Director
Global Asset Management Firm
deirdreoconnorkenny@gmail.com
Cindy Ma, Ph.D., CFA
Managing Director
Global Head of Portfolio Valuation & Fund Advisory Services
Houlihan Lokey
212.497.7970 • CMa@HL.com

23. 22
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