Determining the fair value of Private Equity (PE) assets is a primary application in valuation – crucial in the current context of a raising interest in this investment class. Christophe Vandendorpe and Elena Moisei from EY Luxembourg share the latest changes in international valuation guidelines.
For those working in PE, terms such as “Series A-B-C shares”, “management investment plans”, “profit participating loans”, etc. probably sound familiar to you. The particular features that these instruments display frequently raise challenging questions with regards to their valuation for transactional or reporting purposes. Recent valuation guidelines, such as the latest 2022 edition of the International Valuation Standards (IVS) are tackling this question to bring further clarity on this often-complex valuation issue.
Determining value of the unlisted
As announced by International Valuation Standards Council (IVSC) on 31 July 2021 and effective as of 31 January 2022, the latest edition of the IVS marks an important milestone towards harmonizing valuation practice worldwide. Among several updates and additions, one is especially relevant for the Luxembourg market, specifically for private equity funds. The spotlight is shining on a new paragraph dedicated to “Allocation of Value” within the general standard 104 “Bases of Value”, that has been included for the first time.
This new paragraph (number 220) states that allocation of value is the separate apportionment of value of an asset(s) on an individual or component basis. This also means that the sum of the individual components of an asset cannot exceed the asset’s overall value. For example, the sum of ordinary and preferred equity cannot exceed the overall equity value of a PE asset.
Furthermore, the exercise of apportioning value is submitted to several conditions that must be met. Firstly, the valuer must follow the legal and regulatory framework applicable to the subject of valuation. When allocating value of an asset/investment among different classes, it should be provided with a detailed description of the purpose and intended use of the allocation. Also, the valuer has to take into account the specific environment and characteristics of the asset/investment subject to such allocation. Finally, depending on the market environment and asset condition, the valuer has to adopt an appropriate valuation methodology and allocation process which will be relevant for the asset/investment being measured. With regards to this latter condition, it is interesting to read this in parallel to the already existing Asset Standard IVS 200, section 130, which provides further insights on valuation methods that can be used in a PE context, distinguishing simple and complex capital structures.