f private placement valuation was important and considered as an option in 2019, it has become a requirement in 2020. In fact, any alternative investment must undertake an updated valuation to be relevant.
In a normal year, private securities transactions are discussed and negotiated based on pre- and post-money valuations. These valuations—many times third-party reports or reviews—form the basis of an investment by RIA clients. However, in turbulent times, a valuation is a necessity for portfolio management, buy or sell signals, and investor comfort of the known versus the unknown. Traditionally, updates to valuations might be made annually or quarterly. In 2020 it makes sense to have updates more often and faster.
Why a Valuation?
- Portfolio Pricing – An issuer must communicate to investors, advisors, and other stakeholders what the current value of an alternative or private security is for proper management and oversight
- Mark-to-Market – It is the only proper process and in some cases may be required for pricing adjustments
- Independent Review – Having an impartial review or report allows for greater transparency and confidence
- Legal/Regulatory Requirement – Depending on the investment there may be legal or regulatory mandates for an updated valuation
- Credibility – Proper valuation adds credibility, which translates into Investor comfort and action
- Expertise – It is incumbent to have a skilled finance and valuation team with a proven track record perform the valuation
What to Value
A valuation is a discovery process. Whether the instrument is a debt or equity instrument, real estate or an oil and gas transaction, relevant and accurate information is important.
Private placement or alternative investments in ESG, oil and gas, real estate, technology, digital assets and health care all have had volatility and may have changes in the past 90 days which require attention, adjustment, or action. The advisor and client each need to know at what level many illiquid assets are currently valued. A proper valuation may reveal that an illiquid asset is in better condition than its equivalent liquid instrument.
Updated valuation reports should establish either a range or quantified amount on a date certain, be tailored to the specific instrument, use a triangulation of methodologies and, if appropriate, be risk-weighted and risk-adjusted.
Who Performs the Analysis
There are many quality valuation firms from large specialized companies, to accounting firms, to bespoke single sector experts. Our firm, Clear Rating, specializes in custom valuation of private placements, private equity portfolio assessment, ESG verification and review, and digital financial instruments. Our expertise in valuation reports supports issuers, investors, boards of directors, tax preparers, and anyone else that is a stakeholder in the process. Any valuation should be objective, transparent, educational, and inform the reader.
Due Diligence Versus Valuation
Don’t be fooled. A due diligence report is not a valuation report. The due diligence report you receive prior to an investment is just a review of the facts and accuracy of those facts. A valuation report is an assessment of current quantifiable data and metrics. A balanced report will contain relative pricing and comparables, along with aspects of subjectivity and real-world benchmarking.
The bottom line is that an investor needs accurate valuation of their alternative investments. The more information, the greater the comfort to the investor.
Originally published in Financial Advisor April 16, 2020.