Fair value accounting and private equity

To continue attracting capital, private equity firms need the full confidence of investors. But investors are increasingly wary of PE firms’ valuations of their portfolio companies. But firms can take some clear steps to measure fair value.

At a glance:

• PE firms have faced increased scrutiny from the US Securities and Exchange Commission over potential overstatements in the values of their portfolios.
• One way forward is adopting fair value standards. But fair value measurements for portfolio companies are not black and white—using multiple data sets can result in a wide range of valuations.
• A reasonable approach is for PE firms to demonstrate that they have put a rigorous effort behind the fair value estimates they arrived at by accounting for significant uncertainties.
• It is critical that firms have well-defined processes in place to ensure that the models used in their valuations are reasonable and reflect underlying market conditions.