Standards Corner: Valuations
Valuation is the process of determining the values ascribed to each of the funds ‘units of account’ which make up the Net Asset Value (NAV) for the fund. Institutional investors usually require NAVs to be stated on a fair value basis, to satisfy their own accounting requirements. Fair Value is defined 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.” Determining Fair Value can be straight forward for funds that trade in liquid markets, where for example closing prices of securities are readily observable. It gets more difficult, however, when trading activity is not transparent, or when assets (or liabilities) are less liquid or not traded at all.
The SBAI’s Alternative Investment Standards 5 - 8 cover valuations and require managers to establish a robust valuation framework, to address conflicts of interest that can arise between managers and their investors as well as between different investors in the same fund, as well as facilitate timely and robust performance assessment.
- Putting in place adequate governance arrangements in valuations (including segregation of functions, documentation)
- Setting out approaches to value hard-to-value assets to ensure consistency, including setting out pricing hierarchies, tolerances for pricing dispersion, treatment of internally modelled pricing and how these topics should be reported to investors and Fund Boards.
- Disclosure to investors and ongoing reporting requirements
- Establishing a valuation Policy Document, setting out the responsibilities, processes and procedures, service level agreements with third party (valuation) providers, and controls/monitoring of third-party providers.
We would like to encourage managers and investors to review the Standards and Guidance as set out above. We also stand ready to engage with regulatory authorities on these issues and add constructively to the debate with the goal of improving outcomes for the investors and investment managers, alike.
