In the frame

A framework outlining how to provide supportable and auditable fair value measurements is being touted as a possible turning point for private fund valuations.

The global Mandatory Performance Framework is designed to enhance consistency and transparency in fair value measurement methodology; it details how much valuation work should be done and how to document the calculations behind a fair value estimation.
“Over time, the application of the MPF should enhance a fund’s valuation process and improve consistency and transparency,” says David Larsen, a managing director at independent advisory firm Duff & Phelps.

The framework is part of the Certified in Entity and Intangible Valuations certification, which is now open to valuations professionals in public and private markets. The optional qualification was established by accountancy firms and industry bodies including the American Institute of Public Accountants and the Royal Institution of Chartered Surveyors as a response to the Securities and Exchange Commission’s concerns over the lack of consistency in valuation methodologies.

Valuations experts choosing to become CEIV-certified have to comply with the MPF, but the framework will likely be extended to those who are not certified to create a “gold standard” in valuations.

“Private funds, especially those who report using US GAAP, will likely be required to adopt the MPF,” Larsen says. “Increasingly funds of all sizes are focusing more efforts on improved valuations processes. In future it may be difficult for LPs to justify investing with GPs that do not have a valuation process compliant with the MPF.”
New auditing standards, which would include fair value estimates, currently being discussed by the US’s Public Company Accounting Oversight Board may also encourage those involved in private fund valuations to adopt the MPF.

“One way to demonstrate to auditors that a fund provides information that is auditable under the new PCAOB proposals would be to comply with the CEIV and MPF,” Larsen says.
Whether private fund valuations professionals will become CEIV-certified is subject to debate; some industry sources say the process may be too admin-heavy for them to adopt it. In addition to initial training and assessment, those certified are subject to continued education requirements and must be engaged in fair value assessments for at least 1,500 hours over a three-year cycle. They are also subject to a quality control and inspection program and potential disciplinary action.

“Possibly [people involved in private fund valuations will become certified] as many of the funds are registered investment advisors and are subject to SEC oversight,” Lindsay Hill, director at audit, tax and consulting firm RSA, says. “But unless there is a wide adoption it will probably be a ‘nice to have’ with an added administrative component that may make adoption too burdensome.”

Valuation boutiques, large and small players are leading the charge to support the credential, Hill adds, while the Big Four accounting firms and other large national and international organizations are more hesitant and performing deeper due diligence before establishing plans of action.