Fair value challenges in the current environment for private equity companies

October 2008

Fair value is one of the hottest topics facing the alternative investments sector today and particularly private equity. The ever-increasing investor, regulatory and accounting pressure for companies to focus more attention on valuation has coincided with the ‘credit crunch’ and the most difficult economic conditions in years.

Nick Rea, UK Private Equity Valuation Partner, recommends private equity organisations consider the following 10 Key Messages for Private Equity Valuations:

1. The demand for transparency over fair value reporting in this industry is increasing.

2. Valuing investments has never been more difficult given the lack of transactions and volatile markets. The application of multiple approaches is recommended – both historic and forward looking.

3. General expectation of some large write-downs in the value of investments, given the significant declines across global markets, especially for 2006 / early 2007 investments.

4. The concept of valuation is clearly set out as ‘exit value’ under US GAAP/ IFRS - i.e. price of immediate sale (regardless of intentions) which overrides any concept of DCF or ‘fundamental value’.

5. Holding at cost for first 12 months needs to be tested via a review of market multiples.

6. The IASB and FASB have recently issued additional guidance on values in inactive markets and fair value accounting. Transactions require careful consideration.

7. Given the unprecedented volatility, consider market prices over a (short) period of time. Marketability discounts may increase given market conditions.

8. Debt values are under scrutiny. But falls in debt values do not mean that the equity is worthless.

9. Significant judgement will be required to arrive at fair value.

10. Proper process and documentation are essential to support judgements taken.

The latest PwC publication on Fair Value Challenges in the Current Environment covers a number of these themes and also contains best practice tips for valuation practitioners.