Mercer Capital's Financial Reporting Blog

Updated: Valuation Best Practices for Venture Capital and Private Equity Funds

The International Private Equity and Venture Capital Valuation (IPEV) Guidelines were developed in 2005 to set out recommendations on best practices in the valuation of private equity investments. The IPEV Board is made up of leading industry associations from around the world, including the National Venture Capital Association (NVCA) and the Private Equity Growth Capital Council (PEGCC) in the United States. In October 2015, the IPEV Board published draft amendments to the existing guidelines that, if approved, will go into effect at the beginning of 2016.

The IPEV Valuation Guidelines are intended to be applicable across a range of private equity funds, defined in a broad fashion to encompass seed and start-up venture capital, buyouts, growth/development capital, mezzanine debt, and other types of private investment vehicles. While US GAAP and IFRS financial reporting guidelines do not require that the IPEV Guidelines be followed, the IPEV Guidelines were created with the compliance requirements and implications of these standards in mind.

The stated objective of the IPEV Valuation Guidelines is to set out best practices where private equity investments are reported at “Fair Value” to help investors make better economic decisions. The guidelines are concerned with valuation from a conceptual, practical, and investor reporting standpoint and do not seek to address best practice as it relates to internal processes, controls/procedures, governance, committee oversight, or the experience/capabilities required of the valuation professional.

The proposed amendments to the IPEV Guidelines include edits to improve readability and clarity of understanding, as well as technical edits. The technical edits include the following:

  1. Update on IASB Unit of Account Progress to conform with international standards.
  2. Additional guidance emphasizing that fair value estimates (1) should be developed independently for each reporting entity (or fund) and (2) should be estimated using consistent valuation techniques.
  3. Modification of guidelines for the valuation of debt for purposes of determining the value of equity, including the treatment of prepayment penalties in the calculation of the fair value of debt.
  4. New guidelines to describe back-testing, including assessing what information was known as of the Measurement Date and whether known information was included in the Fair Value assessment.
  5. New guidelines aimed at clarifying certain valuation techniques, including the use of Market Approaches (Price of Recent Investment, Multiples, Industry Valuation Benchmarks, or Available Market Prices), Income Approaches (Discounted Cash Flows), and Replacement Cost Approach (Net Asset Value).
  6. Discussion of certain special considerations, including non-control minority positions, guidance on mathematical models, and guidance on the sum-of-the-parts method.

With increasing activity and interest from investors, valuation guidance for private equity and venture capital investments continues to become more clearly defined. Mercer Capital will continue to present periodic updates on the evolving fair value landscape here at the Financial Reporting Blog and other forums.

For more information on the guidelines, please refer to the International Private Equity and Venture Capital Valuation Guidelines, Edition December 2015 DRAFT. If you have questions regarding fair value or fair value measurements, please contact a Mercer Capital professional to discuss your situation in confidence.

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Mercer Capital monitors the latest financial reporting news relevant to CFOs and financial managers. The Financial Reporting Blog is updated weekly. Follow us on Twitter at @MercerFairValue.