Article

The value of clear fund reporting in uncertain times

Euan Hamilton 17 Jun 2020

Fund managers are re-assessing their valuation processes and fund reporting in light of market changes and the recent clarifications published by the International Private Equity & Venture Capital Valuation (IPEV) Guidelines Board. Euan Hamilton explains why clear and transparent valuations are important to investors, even when there is uncertainty in the outcome.

Due to the market impacts of COVID-19 and the changing environment in which portfolio companies are operating, many fund managers are grappling with the complexities of updating valuations with limited certainty from their portfolio companies on the route out of the crisis.

Reliable fund reporting

It is important that managers acknowledge the situation in their fund reporting and provide a useful update to investors, who need clarity in order to make investment and allocation decisions throughout the period of market volatility.

While there is a tendency among some fund managers to take a 'wait and see' approach, investors and regulators may have limited patience for unchanging net asset values (NAVs) that offer no insight into a fund manager’s true expectations. Investors will understand if fund reporting is volatile in the coming quarters as new information comes to light. In fact, that is exactly what they will expect.

The recent special valuation guidance published by IPEV reiterates that fair value should be based on information that is “known and knowable” at the valuation date, and “informed judgment is required” in order to provide the most relevant and reliable information to investors.

Peace of mind from fund reporting

Transaction or fairness opinions are becoming increasingly relevant for UK fund managers. Where managers are engaging in a transaction that may not be at arm’s length, there is an increasing focus on ensuring that the price agreed is fair to the investors.

This is particularly important in the current climate, when portfolio companies may need support at short notice through top-up equity or bridge loan financing. There may be limited certainty on future prospects and companies may bypass the normal fundraising process to ensure liquidity is available in time. In such situations, it is vital to ensure that prices agreed are fair to the parties involved.

Where there is uncertainty, you may want to consider the following questions:

Is the pricing arm's-length and is there any indication it may not be fair to investors?
Are investments being allocated across multiple funds and is the price fair to investors in each of those funds?
Are there any minority investors who are not participating and will be diluted?

Get in touch with Euan Hamilton to discuss these issues further.