Mark to (Secondary) Market? Nevermind!

Accounting may bore some people to tears, but it remains a hot button issue in the world of private equity thanks to mark-down pain on the GP side and inconsistencies in implementation for LPs.

Making matters worse, most attempts to clarify the situation have only served to muddy it more. In January, the AICPA released a controversial draft issues paper that provided guidance on how to estimate fair value in relation in NAV (net asset value). It asserted that PE firms should write down a fund if it is traded at a discount in the secondary market, since that’s a tangible transaction to go by. Meanwhile LPs can’t go on a GP’s NAV, they would have to determine NAV independently. This obviously ruffled a few feathers, since distressed LPs have been selling chunks of perfectly healthy buyout funds at greater than 50% discounts on the secondary market.

But it appears looks like the concerns you all voiced at the time haven’t fallen on deaf ears. According to board meeting minutes from earlier this month, the AICPA has pulled back from this assertion, allowing LPs to use the state NAV assigned by the GP. As one LP put it, “They’re essentially saying forget the whole thing!” That’s good news.

However, the Board did indicate that LPs will need to disclose the estimated remaining life of their investments, as well as the amount and timing of remaining capital calls. In other words, predict the future. FASB expects to issue a new draft FSP today, with a 30 day comment period, according to the board meeting minutes.

In the meantime, secondary market advisor Cogent Partners has released a bulletin on the topic, which applauds the revisions to the original draft paper but raises a few more questions. Like, what does an LP do if the financial reporting deadline falls before the arrival of the corresponding quarterly fund financials? Or, what additional fund monitoring demands will LPs need to comply with from auditors?

You can download the bulletin here: Cogent Bulletin

Previously: Mark to (Secondary) Market, Ruffled Feathers Over The Latest Take on FASB 157