- In-house valuation preparation vs. third-party firm
- Frequency of in-house/third party valuations
- Timing of valuation cycle
It has become increasingly common to have a dedicated valuation department that is separate and independent from the deal team. An in-house group exists for the preparation of the valuation models in 83% survey participants.
Most firms, 67%, said they prepare valuations on a quarterly basis, while 28% prepare valuations monthly. Investors continue to seek more transparency and more frequent data reports on their investments.
The valuation cycle has narrowed to meet stakeholder expectations. Approximately 70% of participants said they start the valuation process within 20 business days before the reporting date, while about half complete the process within 20 days after the reporting date.
About 60% of participants said they engage third-party valuation firms in some capacity. The primary objective is to provide additional evidence for the valuation conclusion prepared by the investment managers. Most participants obtain an estimate-of-value report.
Use of technology
- Spreadsheets, internally developed technology, externally purchased technology, or combination
The primary tool for valuations is a spreadsheet with a continued focus on the implementation of a technology platform to drive speed and efficiency throughout the valuation process. We expect continued investment to capture key data inputs and provide consistent reporting through the use of digital workflows, natural language processing, bots, data reporting, and visualization.
- Composition of valuation committee
- Frequency of meetings
- Level of detail in valuation committee review
Oversight of the valuation process has continued to be a focus of stakeholders, evidenced by 74% of participants saying they have a formal valuation committee. The committees typically consist of four to ten members of senior management and usually include the COO, CFO, general counsel and senior portfolio managers. These committees meet quarterly 54%, with many meeting monthly, 36%.
Valuation committees are generally responsible for valuation policy, policy exceptions, valuations exceeding specified thresholds, and reviews of complex and significant valuations.
Approximately half of the valuation committees review 100% of the investment valuations.
- Market approach/DCF and underlying assumptions
- Allocation methodology
- Use of discounts
The majority of valuations are market based (83%), with the use of a discounted cash flow (DCF) approach (61%) as the secondary technique. Survey participants indicated that the DCF approach is complex due to the need to prepare cash flow forecasts, which can be difficult especially with less mature companies or emerging industries.
Approximately half of the participants weight their valuation approaches based on facts and circumstances. Other firms have a primary approach and use alternative approaches to evaluate the conclusion from the primary approach.
One area that continues to be discussed is the allocation of enterprise value to various securities in the capital structure. Most participants use a waterfall approach (75%). With complex capital structures, entities consider other approaches to use such as an option pricing model (OPM).
- Preparation of formal valuation memo
- Content of valuation memo
Most participants, 75%, prepare a formal valuation memo for each investment in addition to the valuation model. These memos typically address company history, performance, rationale for the selected method, key inputs and assumptions, market data, and calibration.
Disclosures included in "unobservable inputs" table in the financial statements footnote
- Methods and most common inputs
Only 15% of participants disclose inputs and assumptions to investors beyond the “unobservable inputs” disclosure requirement. This trend is common among the hedge fund, credit fund, and private equity fund categories.
For those that disclose information beyond the disclosure requirement, 90% include this information within the financial statement footnotes. The remainder present this information within other reporting provided to investors.