How to select an external valuation firm

Question 1

Selecting an external valuation firm

Answer 1

(1) Professional qualifications and objectivity
(2) General understanding of methodologies and input assumptions.
(3) Appropriateness of using third-party valuation firm.
(4) The third-party valuation firm’s processes and controls (SOC 1, backtesting).

Question 2

Methodology

Answer 2

(1) Cost
(2) Market approach (comparable transactions)
(3) Income approach (model-based)

Question 3

Methodology - considerations

Answer 3

(1) Historical information
(2) Significant developments since the most recent investment.
(3) Documentation of the investment.
(4) Review indicative market bids from secondary sources.
(5) Appropriate discounts for lack of marketability and controlling or minority interest.
(6) Summarize findings.

Question 4

Data Security

Answer 4

(1) What are the provider’s own data storage security procedures for their clients.
(2) What measures are in place to detect, respond to and recover from a cyber security issue.

Question 5

Policies, procedures and controls

Answer 5

(1) Does the provider have appropriate internal controls to ensure the quality of its output.
(2) Has provider undertaken a SOC1 external review over its controls and procedures.
(3) What contingency plans does the provider have in place to ensure that it has continuous coverage during critical periods.
(4) What is the review process before the pricing gets released.
(5) What contingency/continuity plans and procedures are in place to ensure availability during an emergency.

Question 6

Suitability and accuracy

Answer 6

(1) Is the universe of products covered by the provider sufficient.
(2) What are the turnaround times for receiving the valuations.
(3) Is the cost competitive and within budget.
(4) Does the provider suffer from bottlenecks at certain periods (quarter-end).
(5) Is the investment manager’s information part of the provider’s data set? Is the fund governing body comfortable with this arrangement.

Question 7

Price challenge process

Answer 7

(1) How quickly are price challenges turned around.

(2) How does the valuation service provider check prices that have been challenged.

Question 8

Transparency and documentation

Answer 8

(1) Are the inputs which are employed disclosed.

(2) How transparent is the provider regarding its valuation policies, procedures and methodologies.