Guide clarifies portfolio company valuations

New AICPA guide offers insights into best practices and examples to help improve valuations

Production managers For some time, the SEC and other regulatory bodies have had concerns that certain valuation practices used by private equity and similar funds to value portfolio companies (for example, over-reliance on historical performance or average multiples) could create an inaccurate understanding of values among investors. To address these concerns and improve valuation practices overall, the AICPA released a working draft of a valuation guide entitled Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies (the Guide). The Guide is not proscriptive, but rather is meant to improve understanding and adherence to ASC 820, Fair Value Measurements and Disclosures. It does not change GAAP, but rather reinforces current valuation regulations and principles and highlights best practices.

The Guide stresses greater transparency into how valuations are performed and into which valuation models are chosen and why. It also calls for increased qualitative and quantitative support for key inputs and assumptions.

Among key issues addressed:

  • Guidance on determining the appropriate unit of account
  • Valuation of debt instruments
  • Valuation of equity interests in both simple and complex capital structures
  • Using calibration to ensure that ongoing assumptions and treatments are consistent with those that were applied in the original transaction
  • Using backtesting to improve valuation practices
  • Factoring the investment time horizon into the valuation

The Guide details leading valuation practices and provides a wealth of real-life examples to help funds determine the right valuation methodologies and to execute them appropriately. Funds should watch for the final guide and review their current portfolio company valuation practices against the advice and examples provided to ensure they are using the right valuation approaches and delivering the best valuation numbers.

Since the draft’s release on May 15, 2018, the AICPA’s Private Equity and Venture Capital Task Force has received and is evaluating comments. The final version is expected to be released in 2019.


No image availableJoe Baxley
Corporate value consulting
T +1 732 516 5536