BVCA: firms not overvaluing assets

General partners are not over-optimistic in their fund valuations and are in fact “typically too conservative in the early years of a fund’s life”, according to research from UK trade body the British Private Equity and Venture Capital Association. 

The results dispute claims GPs routinely overstate a fund’s value to lure investors into future funds, said the report. 

In a universe of around 150 closed funds from its in-house database of UK firms, the BVCA examined the evolution of funds’ interim IRRs to their final realised values. The findings show fund valuations typically normalise at around four to six years 

457What the cynics fail to appreciate is that there are no prizes in private equity for overvaluing an asset458

Anthony Cecil

This could be the result of management fees representing a larger proportion of drawdowns during a fund’s early years—or because GPs only move away from ‘at cost’ valuations over time, the report surmised.  

Some argue the report's findings should not come as a surprise. “What the cynics fail to appreciate is that there are no prizes in private equity for overvaluing an asset,” said Anthony Cecil, KPMG's head of auditing for private equity. 

“There is always a certain amount of unjustified cynicism in relation to GPs' valuations as unquoted asset valuation requires significant professional judgment to be applied,” added Cecil.