Industry Updates

Monetary penalty for failing to obtain third party valuation on illiquid pe investments? $1m - Pluris white paper on portfolio valuations

Thursday, November 18, 2010

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Opalesque Industry Update - Reputational and career damage aside, what is the monetary penalty for failing to obtain a third-party valuation on two illiquid private equity investments?

The answer is $1 million.

Brantley Capital Management recently paid this amount to settle SEC charges that the ﬁrm overvalued investments in order to charge higher investment advisory fees. Speciﬁcally, the complaint accused Brantley of making material misrepresentations and failing to make required disclosures for two investments to the board, auditors and investors.

The problem of hedge funds failing to properly value illiquid assets is so big that the SEC recently established an asset management team in its enforcement division to focus solely on hedge funds, including hedge fund valuation methods and policies.

Several fund managers have disclosed to investors that they are being questioned, including Vision Capital, RAM Capital and NIR. What they all have in common is that independent valuations would have cost a fraction of the potential losses they now face from portfolio mis-valuation.

This paper explores the hurdles of valuing illiquid securities in today’s economic environment, and how hedge fund managers can overcome them. In our experience, there are four key elements to an effective defense in the event of a valuation challenge:

1. Transparent, thorough internal valuation processes
2. Audits by a reputable auditor
3. Documentation of the valuation analyses and methods applied
4. Independent, outside validation of value estimates
This paper will walk through each of the elements and will conclude with a discussion on side pocketing practices.

The full paper may be accessed here: Source

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