The International Private Equity and Venture Capital Valuation (IPEV) Guidelines (‘Valuation Guidelines’) set out recommendations, intended to represent current best practice, on the valuation of Private Capital Investments. The Valuation Guidelines 2022 should be regarded as superseding the previous 2018 Valuation Guidelines issued by the IPEV Board and are considered in effect for reporting periods beginning on or after 1 January 2023.
APPLICABILITY
The Valuation Guidelines are intended to be applicable across the whole range of alternative funds (seed and start-up venture capital, buyouts, growth/development capital, infrastructure, credit, etc.; collectively referred to as Private Capital Funds) and financial instruments commonly held by such funds.
STATUS OF IPEV GUIDELINES
Where there is a conflict between the content of IPEV Guidelines and the requirements of any applicable laws or regulations, accounting standards or generally accepted accounting principles, the latter requirements should take precedence.
IPEV GUIDELINES ISSUED IN DECEMBER 2022
The key purpose of the revised edition of the IPEV guidelines is to not to re-invent the wheel but to provide a framework for consistently determining the fair value of investments held by private capital funds.
Therefore, the enhancements in the 2022 edition are meant to continue to support the existing concepts to assist investors in private capital funds in making better economic decisions in relation to the fair value of the investments.
Five key points to note in the lasts IPEV guidelines changes (effective as of 15 December 2022)
are outlined below:
1. KNOWN OR KNOWABLE INFORMATION AT THE MEASUREMENT DATE
This relates to conditions that existed at the date of measurement. Known or Knowable information pertains to facts, conditions, or observable information which exists as of the measurement date and is available to the valuer or would be available to valuer through routine inquiry or due diligence. For example, the value of a traded share is known or knowable at the measurement date as it can be obtained from the relevant exchange or reporting service. For example, changing markets, new players in the industry, new products, rise in interest rates. These should be considered when deriving an investment’s fair value at a specific date.
2. INCORPORATING ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) FACTORS IN THE VALUATION MODELS
Investors’ needs are evolving and there is an ever-increasing focus on ESG bringing a growing need to integrate ESG into valuation models. ESG factors are becoming an important focus of investors, regulators, and governments. These factors may impact fair value from both a qualitative and quantitative perspective.
3. ADJUSTMENT TO ENTERPRISE VALUE, FOR COMPANIES IN THEIR EARLY STAGE OR PRE-REVENUE COMPANIES
While there are different ways to value a company in its early stage, it is very subjective to put a value on early-stage entities which are in the pre-revenue stage. Valuation methods and key performance indicators (KPIs) will differ, depending on where the business is. Attention should be paid to how the capital is structured and whether the company is achieving the set milestones, accordingly this would impact the valuation favourably or unfavourably.
4. DISLOCATION OF MARKETS
Relates to volatility and uncertainty, in relation to potential future development i.e. increasing interest rates, Covid-19 pandemic, Russian-Ukraine war amongst others. In these circumstances professional judgment must be applied as it may not be appropriate to use transaction multiples or recent price if the market is changing very rapidly especially those negotiated before a market dislocation to receive significant, if any, weight in determining fair value. In such conditions fair value remains the amount that a market participant would pay in an orderly transaction reflecting current market conditions.
5. DATA QUALITY
There is a renewed emphasis on entities to ensure information gathered during the valuation process is of high-quality ensuring reliability of the data used in each valuation technique.
NEED SOME HELP?
Project accountants specialise in private equity fund accounting and fund administration support services. If you have a query regarding the application of IPEV guidelines, please feel free to reach out to a member of our team or visit www.projectaccountants.co.uk.
