Valuation Oversight for AIFMs. October 2017

Transcription

1 Valuation Oversight for AIFMs October 2017

2 Contents Introduction 3 1. Valuation: Marketing tool or compliance constraint? 6 2. AIFM Valuation process and procedure 8 3. Valuation resources 10 Conclusion 12

3 Introduction On 22 July 2013, the Alternative Investment Fund Managers Directive (AIFMD) went into force. It requires among others, a direct involvement of the alternative investment fund managers (AIFMs) in the valuation of the alternative investment funds (AIFs) that they manage. After almost four years since the introduction of the AIFMD, we considered the timing appropriate to listen to the viewpoints of professionals directly interested by the valuation governance of AIF assets. In this perspective, we organized a roundtable on the valuation oversight for AIFMs focusing on three key pillars: Valuation: Marketing tool or compliance constraint AIFM Valuation process and procedures Valuation resources The roundtable was structured around 35 multiple choice questions, a subject of debate among the participants, further evidencing that the covered topics are still evolving after the enforcement of the AIFMD. The questionnaire was subsequently grouped into two types of questions: specific, regarding the three key pillars and generic, on valuation in general. The majority of the participants in this roundtable were composed of risk managers who are directly involved in the valuation of the assets as well as other professionals like portfolio managers and depositary bankers. The majority of the participants work on multiple asset classes whereas a minority of them are specialized on either real estate (RE) or private equity (PE). During the roundtable all type of funds were represented: regulated funds, non-regulated funds with a regulated manager (e.g., Reserved Alternative Investment Funds, RAIFs) and non-regulated funds. Furthermore, the assets under management ( AUM ) or under administration by the groups represented indicates that all of the participants had asset under management above 500m with nearly half of them managed or administered more than 5b of AUM. A key result of the roundtable is that the participants wide variety of backgrounds confirms once again the growing relevance of valuation within the professionals of the alternative investment fund industry, as already evidenced in the EY 2016 Global Private Equity and Investor survey. Valuation Oversight for AIFMs 3

4 EY 2016 Global Private Equity and Investor Survey Regulators & Auditors are increasingly attentive to proper application of valuation policies and valuation skills (e.g., Patriarch partners case) PE managers use transparent and independent valuation as a compétitive advantage PE managers are increasingly opening up their files to Investors/ LPs in a move for more transparency Perspectives of the participants Investors/LPs are performing more due diligence, want to understand valuation process and are increasingly comfortable with valuation function outsourcing Sources: EY 2016 Global Private Equity & Investor Survey Independent directors are increasingly looking into valuation matters AIF Valuation Oversight - Roundtable composition Risk Managers 44% Valuation Officer 11% Depositary banks 11% Asset/Portfolio Managers 33% Under the current legislation, the valuation function may be conducted either by the AIFM itself or by an appointed external valuer. In order to be appointed, the external valuer must be professionally recognized, offer professional guarantees and grant its independence from the AIF, the AIFM and any other person with close links to the AIF or AIFM. Most of the roundtable s participants have internalized the valuation function engaging external advisers only by exception (e.g., complex valuations, non-ordinary alternative investments). The minority (22% of the total) has externalized the function. 4 Valuation Oversight for AIFMs

5 Parties eligible to perform the valuation function AIFM or EXTERNAL VALUER Functionally independent Internal valuer Definig control checks and safeguards Dealing with inappropriate influence Mitigating conflicts of interest Experienced in valuation matters Eventually supported by external valuation experts External valuer Independent from AIF/AIFM Experienced in valuation matters Selected by initial and periodic due diligences Complied with the overall requirements on delegation Instructed by AIFM One of the major topics covered in the introduction was whether or not the AIFM still remains fully responsible towards the AIF in case an external valuer is nominated. In this regard, the Directive mentions that the AIFM remains ultimately responsible for the proper valuation of the assets, the calculation of the net asset value (NAV) and the AIFM s liability towards the AIF. On the other side, the external valuer is liable to the AIFM for any losses incurred by the AIFM as a result of the external valuer s negligence or intentional failure to perform its tasks. Since the ultimate purpose of valuation is measuring and mitigating risks, the participants agreed in considering the initial phases, the set-up and the investment, the most critical ones in terms of time and resources dedicated. This conclusion is mainly due to the focus on the internal policies and procedures required to comply with the AIFMD valuation requirements (i.e., set-up of written internal policies and procedures for each AIF). Valuation Oversight for AIFMs 5

6 1 Valuation: Marketing tool or compliance constraint? 6 Valuation Oversight for AIFMs

7 The increasingly stringent regulation and the trend towards fair value reporting have led to an increased demand for independent valuation services in recent years. The main point of debate within the roundtable was the use of external valuations as a marketing tool or their function representing a mere compliance constraint. In this regard, the different types of AIFs seem to impact significantly. In detail, the participants agreed on distinguishing the cases of regulated and unregulated entities. In case of regulated entities, valuation is considered an ordinary service to be performed in order to meet the regulatory constraints. By contrast, the unregulated, in particular the new form of RAIF, offers more opportunities to externalize valuation functions due to the wide range of assets they can invest in. The RAIFs as well as other types of non UCITS regulated entities (e.g., SICARs and SIFs) can adopt a relatively more flexible fund strategy and invest in different asset classes having fewer restrictions in terms of portfolio diversification. In conclusion, excluding the specific exceptions just mentioned, valuation represents a must have rather than a marketing tool to increase the marketability of the funds. Valuation process Valuation methodologies Information and models Valuation policies Value of individual assets Calculation of NAV per share Frequency of valuation of asset and NAV calculation Regulatory requirements laid down in local law as a consequence of the AIFMD For each AIF that AIFMs manage: AIFM obligation to establish appropriately and consistent valuation procedures Written policies and procedures: sound, transparent, comprehensive and appropriate documented valuation process Proper and independent valuation of AIF asset According to the participants experiences, valuation is often included in a portfolio of services offered to the institutional clients and in limited cases it is presented on a stand-alone basis. AIFMs rarely mentioned separately the valuation fee quotes in a service proposal as such. In the context of valuation offering, the participants discussed whether valuations were market oriented or whether some conservatism was applied when coming to a valuation result. The large majority of the participants agreed on the application of a market-oriented approach also due to the explicit guidelines provided by the International Financing Reporting Standards (IFRS), the International Private Equity and Venture Capital Valuation Guidelines (IPEV) and the European Association for Investors in Non-Listed Real Estate Vehicles Guidelines (INREV). However from the debate it emerged that in a few cases a conservative approach may be more appropriate e.g., when the client is a fund reserved to a single shareholder, it might be preferable to apply a conservative approach given the high illiquidity of the investment. By contrast, if the fund holds a large investor base, the market oriented approach is generally considered more appropriate. Valuation Oversight for AIFMs 7

8 2 AIFM Valuation process and procedure 8 Valuation Oversight for AIFMs

9 The current legal framework of valuation includes the AIFMD as well as the IPEV, INREV and IFRS valuation principles. According to the participants, the current regulatory framework is not detailed enough and barely covers all the asset classes within the alternative investments context. Nevertheless, some concerns that have characterized the past are being resolved. Investors IFRS and other GAAP- Fair Value Measurement The participants believe the processes and procedures are different depending on the underlying asset. What emerged from the discussion is that the assessment process for RE assets is less restrictive and in most cases is performed by third parties while, in PE it is generally internalized. Furthermore the participants clearly identified the roles and duties of the professionals involved in the valuation process as well as indicated that roles and responsibilities were generally speaking clearly defined. There is, however, a perception that market practices still need to emerge. Industry guidelines Valuation under constraint AIFMD Valuation Oversight for AIFMs 9

10 3 Valuation resources 10 Valuation Oversight for AIFMs

11 According to the AIFMD, the AIFMs can delegate the valuation functions to an external valuer. The main parameters considered in the appointment of a third party are the specific expertise of the external appraiser in the valuation of the asset class and its contribution, in terms of value added, to the final outcome. According to the participants, most of the fund managers (67% of the total) hold a dedicated valuation team within the group, often sited outside Luxembourg. With regards to the offer of available valuation trainings, there is a perceived lack of offering on the market for all of the asset classes. Valuation function kept internally Appointment of External Valuer AIFM is ultimately responsible for the proper valuation of AIF assets, NAV calculation and publication Valuation process 5.1 Analyze reports prepared by external valuer 5.2 Prepare reports to BoD and central admin 5 5. Report on asset valuation 1. Re-/Define valuation methodology Inform external valuer of the methodologies to value assets 1.2 Define valuation process, monitoring and re-assessment frequency 4.1 Review individual values 4.2 Identify unexpected differences and coordinate with external valuer to close gaps 4.3 Approve asset valuation 4. Review and approve asset valuation Check quality of input data 3.2 Transmit to external valuer Valuation process Inputs Methodologies Monitoring and reporting 3. Transmit checked data to external valuer 2. Set up process for exchange of information Determine necessary information 2.2 Identify information owners 2.3 Set up instructions and templates 2.4 Etablish communication protocols with external valuer Valuation Oversight for AIFMs 11

12 Conclusion 12 Valuation Oversight for AIFMs

13 To summarize: Near to all participants considered that making the right investments in the set-up phase for the proper design of valuation procedures is key. Doing so, will subsequently relieve significantly the valuation requirements for the benefit of a smooth NAV calculation process. Participants agreed on distinguishing between regulated and unregulated entities. In case of regulated entities, valuation is in fact considered an ordinary service to be performed in order to meet the regulatory requirements. By contrast the unregulated, in particular the new form of RAIF, is more prone to externalize valuation functions. This can be explained by the wide range of assets they can invest in, and also to comfort investors. Adopting a robust valuation process does therefore not appear as being used as a distinctive feature to convince the investor base, despite requests 1 of the investor community to get comfortable with the valuations. The large majority of participants agreed on the application of a market-oriented approach while in a few cases a conservative approach might be more appropriate to apply (e.g., in presence of a single shareholder in a reserved fund). Processes and procedures differ depending on the underlying asset class. In case of RE assets, the assessment process is less restrictive and in most cases performed by third parties while in PE it is generally internalized. AIFMs may externalize the valuation function: most of the participating companies had a dedicated in-house valuation team that is often located abroad, which may eventually be complemented by specific external valuation expertise. This first EY AIFM roundtable on the valuation oversight topic was particularly interesting, as it has shown that the market practices are still emerging, given the diversity of professionals involved and of asset classes covered. EY warmly thanks the roundtable participants for their active participation and gladly noted the interest cfor continuation of such initiatives. 1. EY 2016 Global Private Equity Fund and Investor Survey (in collaboration with Private Equity International) Valuation Oversight for AIFMs 13

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16 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young S.A. All Rights Reserved. ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/luxembourg Contacts Christophe Vandendorpe Executive Director, TS-Transaction Diligence EY Luxembourg christophe.vandendorpe@lu.ey.com Edoardo Battista Ancora Senior Manager, TS-Transaction Diligence EY Luxembourg edoardo-battista.ancora@lu.ey.com