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This past week I attended a valuation conference focused on private equity at the Tuck School of Business at Dartmouth. The main topic of discussion was SFAS 157 and how it might impact the fair value reported by GPs to LPs. The discussion at times became heated, as several GPs were still debating that cost was the best indication of value, while representatives from the Big 4 were saying "that ship has sailed". The Big 4's rationale was that with the passage of 157, they would be relying on the new FASB statement as the guidepost for the carrying value of investments for auditing purposes. Most of the GPs argued that cost was a conservative measure and often the most appropriate indication of fair value.

The questions now become; 1. with the application of SFAS 157, will the general trend be for the carrying value of the GPs investments to be written up or written down? and 2. If there is a change in either direction, will the result change the fund raising environment for GPs over the long-term. In other words, if GPs in total raised the carrying value of their portfolios by 10%, which in turn led LPs to increase their carrying value by 10%, wouldn't the asset allocation of the LPs need to be rebalanced? If so, could SFAS 157 make it more difficult to raise capital, because LPs would eventually reduce their allocation to the alternative asset class? Only time will tell, but my sense is that as SFAS 157 is implemented there will be a renewed sense of focus and discipline to defining fair value.

Category(s): Fair Value Accounting
Posted by Brett Suchor at 09:42 PM | Permalink | Comments (0) | TrackBacks (0)