The New Valuation Guidelines for Venture Capital and Private Equity

For those who missed the new IPEV Valuation Guidelines introduced in Dec 2018, here are the highlights.

The objective of these guidelines is to set out best practice where VC and PE investments are reported at ‘Fair Value’, to standardise the approach worldwide and hence to help investors make better economic decisions.

The most important change is the separation of the basis of valuation, which defines what the carrying amount purports to represent, a Valuation Technique, which details the method or technique for deriving a valuation, and inputs used in the Valuation Technique.

Most fund managers are required 1) to develop their own valuation methodology and documentation for each investment, 2) to have a valuation committee or external experts evaluating their approach, and 3) to backtest the new methods on portfolio investments.

The concept of Fair Value is an artificial construct, only developed in the context of accounting:

• it is the price that would be received to sell an asset in an Orderly Transaction between Market Participants at the Measurement Date
• it is a hypothetical transaction
• interest in the investment must be attributed correctly including options, warrants, and liquidity preferences
• it does not assume that the Shareholder want to sell the assets
• for unquoted companies, it is…