Cornelia Herzog, Assurance FS, Zürich. Private Equity - Fair Value Measurement 9 December 2008

Transcription

1 Cornelia Herzog, Assurance FS, Zürich Private Equity - Measurement

2 Agenda The climb to fair value Current reporting requirements and guidance for valuation Practical issues

3 The climb to fair value Slide 3

4 The climb to fair value Cost: Closed end funds cash at exit Performance: Slide 4

5 The climb to fair value s: Benefits Communication to investors Informed decisions IFRS / US GAAP Regular valuation Slide 5

6 Current reporting requirements and guidance for valuation s: IAS 39: The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction FAS157: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date Slide 6

7 Current reporting requirements and guidance for valuation Fair value hierarchy: 1 Quoted prices 2 Other Observable inputs 3 Valuation techniques Unobservable inputs Slide 7

8 Current reporting requirements and guidance for valuation IFRS Valuation Technique: Maximum use of market inputs All factors market participants would use Generally accepted methodologies Calibration FAS 157 market based measure IASB guidance on fair values in inactive markets Slide 8

9 Current reporting requirements and guidance for valuation IPEVCG (International Private Equity and Venture Capital Valuation Guidelines) Price of recent investment Earnings multiple Net assets Discounted cash flows (underlying business) Discounted cash flows (investment) Industry benchmarks Slide 9

10 Current reporting requirements and guidance for valuation IASB guidance on fair values in inactive markets Disclosure of the control environment Disclosure of valuation techniques Disclosure within the 3 level hierarchy Disclosure of unobservable inputs Effect of reasonable possible alternative assumptions Slide 10

11 Current reporting requirements and guidance for valuation - Illustrative Examples Slide 11

12 Current reporting requirements and guidance for valuation Illustrative Examples IFRS 7 outlook Proposed amendment to IFRS 7: Assets measured at fair value FVTPL Quoted prices in active markets for the same instrument (Level 1) 25 Fair value measurement at end of the reporting period based on: Valuation techniques for which all significant inputs are based on observable market data (Level 2) 15 Valuation techniques for which any significant input is not based on observable market data (Level 3) 16 AFS Slide 12

13 Current reporting requirements and guidance for valuation Illustrative Examples IFRS 7 outlook Proposed amendment to IFRS 7: Level 3 assets: FVTPL AFS Total Beginning Gains or losses in p&l - Gains or losses in comprehensive income Purchase, Issue, settlement Transfer in/out level 3 End 11 - (7) (2) 16 (3) (5) (2) 30 Total unrealised gains/losses in p&l 7-7 Slide 13

14 Current reporting requirements and guidance for valuation Illustrative Examples FAS 157 outlook Input Level 1 Level 2 Level 3 Spot currency rate X Price per square foot X Listed price X LIBOR X Implied volatility X Historical volatility X Historical info about customer solvency X Financial forecast X Slide 14

15 Practical issues Earnings multiple - post tax earnings, P/E multiple => equity value - EBIT, EBIT multiple => enterprise value - comparable companies - lack of consistency between multiples and earnings used Averaging of multiples and approaches - 2 market leaders, 2 underperforming smaller companies => mid-tier firm? Secondary Investments - how to treat the discount / premium Slide 15

16 Practical issues Documentation Fund of Fund investment - Time lag of available information at NAV date - Restrictions on obtaining information - fund doesn t fair value the investments - look-through approach not applied Slide 16

17 Financial Instruments of FoF Investments IAS 39 look through Valuation in Compliance with IAS 39 Fund-of-funds IFRS Limited Partnership Limited B Partnership B Company 1 Limited Partnership Limited C Partnership D Limited Partnership LimitedI Partnership LimitedI Partnership LimitedI Partnership LimitedI Partnership K Cost EVCA US GAAP UK GAAP??? Company 2 Company 4 Company 3 Company 5 Company 6 Company 8 Company 7 Company 9 Company 10 Company 11??? Slide 17

18 Practical issues Limited Partnership look through valuation process - BoD responsible for IFRS conform valuation - Integration of impairment test into valuation process - Valuation at least once a year - Objective: Value adjustments of underlying investments for: - Listed securities; adjustment to reflect market price - Incidents that may occur in the time lag from received report to cutoff date - Different valuation methods / accounting standards (ie. Cost accounting etc.) in partnerships reports Slide 18

19 Practical issues Limited Partnership look through valuation process Obtaining Information Regular contact with GP (Advisory Board) of underlying fund Obtain seat in Advisory Board of the underlying fund Review secondary market transactions Compare different underlying fund valuations Obtain direct information of underlying investment Slide 19

20 Summary The International Accounting Standards Regulation will introduce a new era of transparency and put an end to the current Tower of Babel in financial reporting It will allow investors and other stakeholders to compare companies performance against a common standard Frits Bolkestein, EC Internal Markets Commissioner Slide 20

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