Note : Includes venture capital, LBO, mezzanine, turnaround and recapitalization-focused funds.
Source: Thomson Venture Economics/National Venture Capital Association; Goldman Sachs for 2005 buyout data.
Determining fair value requires managers to exercise judgment. While each manager’s judgment may result in different but supportable views on valuation, using common guidelines consistent with GAAP should narrow the range of these numbers. The PEIGG PE Valuation Guidelines and the International Private Equity and Venture Capital Valuation Guidelines (currently undergoing harmonization) provide the PE industry with best practices in determining fair value in accordance with GAAP. The historic bias that used cost as the best estimate of fair value is giving way to the practice of applying a valuation methodology appropriate for the facts and circumstances of an investment. In general, fair value would be determined using the following hierarchy:
Cost or the latest round of financing for a period of
Quoted prices in active markets if they are available.
Comparable company transactions.
Other valuation methodologies such as discounted cash flow (this should be used rarely, and with caution, for PE investments).
As the private equity industry matures, it needs greater consistency in the reported results and valuation approaches used by managers of, and investors in, private equity funds. The PEIGG and European PE Valuation Guidelines were designed to provide a framework for valuing private equity investments using transparent methodologies intended to be consistent with relevant GAAP.
David L. Larsen,
partner, KPMG LLP’s transaction
services practice, and leader, the institutional investor
segment, private equity practice, San Francisco