As the secondaries market continues to mature and both secondaries buyers and sellers are actively managing their portfolio, investors are increasingly asking for more transparency and independence when general partners report fund valuations.
“There appears to be a growing demand by institutional LP investors such as pension funds and sovereign wealth funds that alternative asset managers introduce more independence into the process of valuing their illiquid assets,” Cindy Ma, global head of Houlihan Lokey’s portfolio valuation and advisory services practice, told Secondaries Investor’s sister publication Private Funds Management, in an article published earlier this month.
As a growing number of LPs focus on actively managing their portfolio of private equity fund interests and as they increasingly use the secondaries market to do so, methods to report valuations are particularly becoming important to secondaries investors.
“Investors are likely to increase their focus on transparency of information,” Ma added. “As the secondary market for fund LP interests continues to grow, transparency of fund information along with reliable (and independent) valuation marks become more and more important to LPs, particularly institutional LPs that periodically rebalance their investment portfolios through secondary market purchases and sales.”
Methods to value private equity investments vary greatly, and although many seem to use discounted cashflow analysis, especially for mature companies, there’s no universal way to calculate valuations, making it difficult in some cases for secondaries buyers and sellers to assess potential transactions.
“You need to know which comps the GP is using to calculate their NAV,” said one secondaries investor based in New York, adding that it’s not always clear, especially in more emerging economies where data is harder to obtain.
LPs’ push toward greater transparency and independence of valuation reporting comes at a time when regulators across the globe are also taking a close look at how alternative investment fund managers report valuations.