PE/VC Quarterly Valuations - The TLDRPrivate equity and venture capital firms are required to value their portfolio of investments quarterly. Those values are published on a schedule of investments (SOI) that is shared with investors and establishes the value of the PE/VC investment fund. At year-end, they review these valuations in detail with their auditors, who are required to sign-off on the numbers. We wrote more about this previously in our July 2022 post #16 Quarterly Valuation Time.
Sounds easy, right? Not exactly! PE/VC investments aren’t publicly traded stocks (liquid assets), where a price is set every day by buyers and sellers. When you look at your stock portfolio, you know how much it is worth at the end of the day. Not here.
PE/VC investments are illiquid assets (similar to real estate). That means they can’t be sold quickly and/or a price isn’t set by market participants every day. Say you invested in a company 2 years ago - is that investment worth what you paid for it, more, or less? The answer is that “it depends!”
In early-stage VC, companies are young, still developing their products, and often “pre-revenue.” Investors hope big revenues will come in the future but they aren’t there yet! Contrast that with later-stage VC or PE investments. These companies are more mature and have better “comparable companies” to help determine a “fair” value. Different company stages and types require different approaches.
Setting the Scene (2022 was Rough)In case you haven’t heard, 2022 was a challenging year for technology stocks (-30%+) and venture capital, making the Q4’22 valuation process even more challenging! You can read more via these links about What Happened in 2022 and What Will Happen in 2023 (thanks Fred).
Updating Your Valuation Policy @ Q4There isn’t a one-size fits all approach to quarterly valuations! It is driven by where you invest (early vs. late-stage, etc.), the asset type, and your investor, legal, accounting, auditing requirements, and other factors.
To recap, a valuation policy is an outline of the approach your fund takes to determine the fair value of its portfolio company assets for financial reporting. Fund valuation policies are usually flexible frameworks that VC funds create for their portfolio company investments.
The American Institute of Certified Public Accountants (AICPA) provides guidance to help fund managers and other stakeholders (such as auditors, investors, and valuation specialists) understand the valuation process. The guidance outlines current best practices for valuing investment assets in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and the accounting standard known as ASC 820.
Once established, a fund’s valuation policy isn’t set in stone: You can and should assess and adjust your fund’s valuation policy to be sure it’s suitable for the stage and type of investments your fund owns. Most fund managers review and update their fund valuation policies on an annual basis. Does yours need updating now?