Financial Markets’ valuation benchmarking insights
Overview
In recent years, there has been an increased focus from stakeholders in the asset management sector on the valuation process and governance for assets that are not readily marketable or traded on a regular basis. The asset management sector owns the largest concentration of these assets, but private investors in the insurance sector and, to a lesser extent, in the banking sector are invested as well.
One key trend involves the expansion of investment dollars in private assets by corporates, sovereigns, and pension plans. This growth is likely driven by global capital markets reacting to the historically low interest rate environment. To increase returns, investors have expanded into equity as well as other credit assets. Investments in private debt have been concentrated in loans and structured products.
PwC conducted a survey designed to gather, analyze, and share information about key industry issues and metrics. This survey focused on 80 US-based asset management firms representing more than $1.6 trillion of AUM, and it included hedge funds, credit funds and private equity funds.
Survey topics
- Valuation process
- Use of technology
- Valuation governance/oversight
- Valuation methodology
- Valuation documentation
- External reporting
Valuation process
- In-house valuation preparation vs. third-party firm
- Frequency of in-house/third party valuations
- Timing of valuation cycle
It has become increasingly common to have a dedicated valuation department that is separate and independent from the deal team. An in-house group exists for the preparation of the valuation models in 83% survey participants.
Most firms, 67%, said they prepare valuations on a quarterly basis, while 28% prepare valuations monthly. Investors continue to seek more transparency and more frequent data reports on their investments.
The valuation cycle has narrowed to meet stakeholder expectations. Approximately 70% of participants said they start the valuation process within 20 business days before the reporting date, while about half complete the process within 20 days after the reporting date.
About 60% of participants said they engage third-party valuation firms in some capacity. The primary objective is to provide additional evidence for the valuation conclusion prepared by the investment managers. Most participants obtain an estimate-of-value report.
Summary
Regulatory and stakeholder attention to the valuation process is likely to drive a continued focus on enhancing these activities for the near future.
The recent release of the AICPA Private Equity and Venture Capital accounting and valuation guide will likely encourage process enhancement, particularly over documentation, inputs and assumptions, and calibration techniques. While the state of current technology in this space remains dedicated to the spreadsheet function, investments in technology and automated tools are likely to help with incorporating improvements going forward.
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