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.
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.
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:
Get in touch with Euan Hamilton to discuss these issues further.
Our team regularly publishes LinkedIn articles, highlighting issues as they arise. Follow the links below or search #GTValuations on the platform:
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