Why Using an Independent Valuation Firm Is a Best Practice for Funds
By Murray C. Grenville, CEO, Sterling Valuation Group
Investment companies such as hedge funds and private-equity funds hire outside expertise like Sterling Valuation Group to provide independent valuations of the funds’ illiquid and otherwise complicated assets.
They do this to reassure their investors that the price tags they’ve put on these assets are reasonable and “fair market value.” While the funds internally value the assets, the independent valuator is hired to address the potential conflict because the funds’ fees are based on the fund’s performance. The purpose of the process is to reassure the limited partners.
Investors need to know that the valuations placed on these nontraditional assets — real estate, mines, certain derivatives, leveraged loans, PIPE investments, and many others — are appropriate. Our work provides guidance for the limited partners for understanding the assets’ values. Using an independent valuator is now considered a best practice for funds.
Additionally, our work offers a fund guidance on its own valuations and valuation methods. Having an outside valuator encourages the fund to develop more reasonable valuations — and a more realistic exit strategy/outlook.
Our relationship with a fund is based on some simple ground rules. Funds shouldn’t be quick to resist a valuator’s deviation from its own calculation. A correct valuation depends on the facts at the time of the valuation. The facts are the facts; where the parties sometimes disagree is in the interpretation of those facts.
To conduct our work, in addition to our internal resources, we draw on a diverse team of professionals, including academic advisors and legal counsel with specific industry or product expertise. Our collaborative team includes professors and analysts with years of experience in the valuation of a diverse range of difficult-to-value assets. Each member brings a distinct angle on valuation, specializing in areas from mortgages to derivatives to whole companies.
Limited partners must understand that our team relies on internal data given to us by the funds. Our valuations are not audits or due-diligence investigations. Also, given the nature of these assets, we can’t pinpoint the price exactly. We calculate a range that involves complicated judgment calls. Valuation is an art, not a science.
In the end, it’s the fund’s decision on what valuation to report to its investors. We share informational copies of our reports with limited partners, subject to the disclosure provisions contained in the reports. At the request of our client, we will send copies of the valuation reports directly to the administrators.