Other Flashcards
Why the SEC believes valuation is so important
(1) It ultimately results in the calculation of the fund’s NAV
(2) It is used to determine the purchase price into the fund.
(3) It is used to determine redemption price for investors who exit the fund.
(4) It is used to determine incentive fees for managers of the fund.
Investment Lens
It is important not to apply an “investment lens” to the asset being valued - i.e., the firm holding the asset presumably purchased the asset for a determinable period of time for which they think there will be a gain in the future, so they are looking at the assets in a completely different way.
Calibration (part 1 of 2)
If the transaction price is fair value at initial recognition and a valuation technique that uses unobservable inputs will be used to measure fair value in subsequent periords, the valuation technique shall be calibrated so that at initial recognition the result of the valuation technique equals the transaction price.
For example, what are the multiples implied by the investment value? What IRR or discount rate solves the DCF analysis to the transaction price?
Calibration (part 2 of 2)
Calibration also may be used to infer the equity value for the company from a transaction involving the company’s own instruments. Calibrating to any recent transactions in the company’s own instruments requires considering the rights and preferences of each class of equity and solving for the total equity value that is consistent with a recent transaction in the company’s own instruments, considering the rights and preferences of each class of equity.
Backtesting (part 1 of 3)
Backtesting (also called a “retrospective review”) refers to the process of using the observed value of the fund’s interests as implied by the ultimate sale, liquidity event (for example, an IPO) or other significant change in facts with respect to those interests, related instruments, or the enterprise, to assess the fair value estimated for an investment in a position in the enterprise as of an earlier measurement date (or measurement dates).
Backtesting (part 2 of 3)
The purpose of backtesting is to assess and improve the investment company’s process for developing fair value measurements with benefit of hindsight.
Backtesting (part 3 of 3)
Importantly, even a large difference does not necessarily mean the earlier estimate lacked sufficient support or rigor. Between the measurement date and the observed transaction, there may have been meaningful and justifiable substantive differences in the company’s position, the outlook for its business, or the external market, among other factors.
Valuation Policy (part 1 of 2)
The triangular relationship of the fund governing body, third-party valuation service provider and investment manager will vary from situation to situation. Where the investment manager has a material role in the valuation of the fund’s portfolio, independent control reports, like those produced by most third-party valuation service providers, can be one way of providing investors with comfort regarding managing any conflicts of interest.
Valuation Policy (part 2 of 2)
The primary tension in the valuation of level 3 assets is that between independence and expertise. For a pure corporate governance and conflicts of interest point of view, it is clearly preferable that the responsibility for the valuation of a portfolio is taken by a valuation service provider which is not only independent of the fund and the investment manager, but has no other interests that materially conflict with any duties it has to the fund.
Fair Value
FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
AIMA Guide
Alternative Investment Management Association - Guide to Sound Practices for The Valuation of Investments.
Cryptocurrencies
Cryptocurrencies are:
(1) digital assets
(2) secured with cryptography
(3) characterized by decentralized control, a public transaction database, and blockchain technology.
