Mark to (Secondary) Market: Take Two

Yesterday I wrote about the AICPA’s recent draft issues paper, which tackles ways for LPs to implement FASB 157. The story highlighted the opinions of a few unnamed LPs, who expressed frustrations with the paper’s guidelines, and several others left lengthy comments. (View that, along with the actual paper, here.)

But that’s just one side of the coin.

There are others who think these dissenters are just unhappy with mark-to-market in general, and that the ultimate outcome of the paper’s “considerations” would be a positive. In a few quarters, LPs will have more accurate holding values for LP portfolios, they say. One advisor I talked to said that LPs are angry because it means more work for them.

Basically, the AICPA proposal says that LPs should take secondary transactions into account for valuing their holdings, among other things. Some LPs are annoyed by this because it could lead to massive write-downs, given the irrational, depressed secondary market.

But the counter-point to that is that LPs are overreacting. The paper merely states that secondary transactions should be taken into consideration as one of several ways to determine fair value. Likewise, the paper does make a distinction between forced secondary sales in distressed situations (and lower prices) and a normal changing-of-hands. Dissenting LPs have argued that the defining a “distressed” sale is difficult, and the AICPA’s definition is vague.

At issue for many LPs, I suspect, is the idea that they have to come up with their own valuations for funds they’ve invested in, rather than go with the value the GP assigns. The overall point of the paper is for LPs to no longer simply take NAV as the value. This could lead to vastly different carrying values for different LPs in the same fund and increased volatility for LPs.

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