A number of buyout pros have shown concern about a draft issues paper the AICPA released this month. The paper provides guidance on how to estimate fair value, particularly in relation to NAV. I combed through it and have to agree with one LP’s assertion that, “The first page or so is all motherhood and apple pie, but by the time you get to the third or fourth page it hardly makes sense…” Of course, I’m not an accountant, but I think the takeaway is worth addressing.
More than one PE pro has expressed frustrations to me over the NAV issue. It seems the paper indicates that PE firms should write down a fund if it is trading at a discount in the secondary market, since that is a tangible transaction to go by.
But that doesn’t seem to add up. A saturated, irrational secondary market that’s influenced by LP cash constraints doesn’t necessarily reflect the worth of the underlying assets in PE funds. Just because a desperate LP sells its interest in a fund for 60% of its value, doesn’t mean that fund won’t yield a return. Add that to the fact that not a lot of secondary trades actually come to fruition. I get the sense that some GPs and LPs think this method of valuation would create a slippery slope of write-downs based on uncertainties. But since I’ve only started looking into this, I’d love to get other perspectives.
Also: I wonder but haven’t had time to ask anyone, what do secondary funds think of this? It doesn’t seem to make any difference what a GP values his or her portfolio at because secondary buyers do their own valuations.
UPDATE: I’ve posted a piece on the flip-side of this argument. View it here: Ruffled Feathers Take Two