FAS 157 + Market Crash = Investments Valued At 0?

Mark-to-market accounting doesn’t translate well when the the S&P and Dow are down roughly 30% for the year.

If Fair Accounting Standards laws base a portfolio company’s value on public market comps, then a major stock market drop like the one last week might equal a balance sheet eyesore for PE.

At a conference yesterday, the question of fair accounting standards was raised in relation to the erratic market performance. After such an unprecedented decline, is it possible that some investments might be marked to zero?

The answer, given by Riverside Company’s Bela Szigethy, was a long pause, and then simply, “Yes.”

But it’s apparently nothing for GPs to worry about. “People obviously know what’s going on,” he said. “LPs don’t pay as much attention to quarterly reports. They pay more attention to cash on cash returns.” This is especially true for long-term, patient LPs, which I believe means repeat investors such as public pension funds. “Those who have gone after less-patient, more aggressive money will have problems,” he added. I believe this was in reference to hedge funds.

Bottom line: Everyone is hating on hedge funds these says, so pile on. Hedge funds in your funds is bad news.

But after yesterday’s news of a patient, stable LP like Harvard dumping more than $1 billion in alternative investment commitments, that argument gets a bit tougher. I’m sure they aren’t unloading the commitments merely for accounting write-down purposes, but it doesn’t help. Let’s just say I’m sure most LPs will be happy that PE firms can hold their investments for as long as they want, because based on mark-to-market valuations, no one’s holdings are looking very hot.

The conference, titled “Top Trends In Private Equity” and based on a Grant Thornton White Paper of the same name, was hosted by ACG, GT, and NASDAQ.