portfolio valuation & fund advisory
Valuing a business, whether that be for an M & A transaction or valuing a business for the purposes of an investment portfolio or a fund position utilises the same skill set.
Portfolio valuation is done to determine and report on investment performance, which is often required for financial reporting and tax compliance, and also affects the investment manager’s compensation. Private equity funds, hedge funds, venture capital funds, and institutional asset managers (such as pension fund managers) are increasingly seeking independent portfolio valuation services from professionals with expertise in valuing non-publicly listed assets like businesses and derivative securities.
Private investment entities often own a variety of securities, businesses, and other property, and because they are private—not publicly traded—there are no publicly traded stocks or other market values to establish the market value of all holdings. Like other private entities, the finances of private and institutional investors tend to be opaque. Evaluation of these entities’ investment holdings by an independent third party provides more transparency into the value of the assets they hold.
An independent portfolio valuation ensures that assets have been valued according to the policies and laws governing valuations. It also ensures that valuations are conducted in compliance with tax guidelines, to prevent underreporting of the values on which taxes are based.
When assets are liquid and publicly traded, the task is simple: The market values of assets (stocks and bonds) can be looked up and added together. But when illiquid assets such as real and personal property—businesses, land, buildings, machinery, and equipment—comprise part or all of the assets, it becomes much more difficult to establish value, because there often isn’t a market to determine the price.
An independent private equity portfolio valuation not only establishes a reliable value since it is calculated by a disinterested third party, but also provides the information the fund needs to finalize its financial statements. After the third-party evaluation is completed, the auditor can then sign off on the financial statements. Auditors have an obligation to ensure that the financials conform to Generally Accepted Accounting Principles (GAAP), and independent portfolio valuation performed by valuation experts ensures that assets have been properly valued, thus expediting the audit.
As noted previously, for publicly-traded financial securities such as stocks and bonds, the valuation process is straightforward: The value of these assets is determined by the market. The appraiser simply has to look up the current market prices and add them together to arrive at a value.
For private assets - which can include businesses, business assets like equipment and real property, real estate, illiquid stocks, and other property, as well as intangible assets such as patents and trademarks—the appraiser will value each asset separately and calculate the value of each using the appropriate valuation method or methods.
The three standard valuation approaches are the market, income, and cash valuation approaches. The best method or methods to use will vary depending on the asset being valued. For real estate assets, the market approach will likely be used, with comparable establishing the value of the asset.
In the case of businesses, all three approaches may be used, with the value determined by averaging the value calculated using each approach.
Once all assets have been evaluated individually, the appraiser will add the values of the assets together to arrive at the overall value of the portfolio.
