AMF sympathetic to valuation challenges facing private equity
The Autorité des Marchés Financiers (AMF), the French regulator, has said it understands some small private equity firms may face challenges providing independent valuation of private assets as mandated under the Alternative Investment Fund Managers Directive (AIFMD), but said the process should be manageable.
AIFMD requires an independent valuation of the assets of private equity funds . If undertaken internally by the private equity firm, such valuation must be performed by collaborators wholly separate from internal deal teams. Historically deal teams carried out valuation tasks, which were then sent to financial control, and then to an internal valuations committee. Valuing private, hard-to-value assets is not always straightforward and some firms may struggle to provide their reports in the 30-day time-frame laid down by the Directive.
Perhaps the most significant challenge is demonstrating the valuation process is independent from the portfolio managers and figures in charge of determining remuneration. “We at the AMF appreciate that a private equity house with 10 or so employees could find it difficult to find an individual to provide independent valuation that is not conflicted. One solution could be to offer the role to an individual in a risk management function at the firm or a similar middle office role functionally separate from the investment team,” said Frédéric Pelese, deputy head of division for asset management regulation at the AMF, speaking at the SuperReturn CFO/COO Forum in Amsterdam.
This could require smaller private equity houses to make external hires, something which certainly will not be cheap. Alternatively, they could appoint an external valuer but very few service providers are willing to take on the additional liability it entails. AIFMD states the valuer is liable to the fund manager and this liability cannot be limited.