PE fair value terms become increasingly specific – report

Private equity assets held by mutual funds are being subjected to increasingly strict criteria when it comes to revaluation, according to a recent Deloitte report.

The survey reported that firms increasingly re-assess the valuation of a private equity investment based on four ‘trigger events’, with 20 percent more firms responding to these triggers than three years ago, in some cases.

Of the 89 fund firms surveyed, 58 percent held private equity assets through direct private equity investments. Seventy percent included macro developments in the industry of a portfolio company in their revaluation processes, compared with 50 percent in 2014.
Changes in the portfolio company’s debt structure were considered by only 41 percent of firms in 2014, while 63 percent now apply this to revaluations.

Leadership changes were considered a factor by 36 percent in 2014, but prioritized by 50 percent of respondents this year.

Performance of broad-based indices also fluctuate in importance. Last year , only 29 percent of firms would revalue a private equity asset on this basis. This year, 43 percent said this would prompt a revaluation.

The increase in responses to certain valuation triggers, suggests that “some investment companies have inserted more structure into their policies and procedures, perhaps to enhance consistency in approach, even if many of these factors have always been generally considered during the valuation process,” the report said.