REVISED PRIVATE EQUITY VALUATION GUIDELINES ISSUED

Introduction
The Private Equity Industry Guidelines Group (PEIGG) recently issued a revised version of its U. S. Private Equity Valuation Guidelines. The revised Guidelines, issued in March 2007, provide guidance to private equity funds on how to value their portfolio investments. A copy of the Guidelines can be found here.

GAAP Requires Fair Value
Generally accepted accounting principles (GAAP) require private equity funds to report portfolio investments on their financial statements at “fair value.” Until recently, however, there was no authoritative guidance on how to determine the fair value of an investment. The PEIGG was formed in February 2002, and is comprised of a volunteer group of private equity industry representatives who came together to establish a set of reporting guidelines for the industry. The Group is a broad-based alliance, consisting of general partners (managers), limited partners (investors) and service providers from both the venture and buyout segments of the private equity industry. It issued its initial Private Equity Valuation Guidelines in 2003.

The recent revision to the Guidelines was prompted in large measure by the issuance in September 2006 by the Financial Accounting Standards Board (FASB) of Statement No. 157. The purpose of FASB 157 was to clarify the meaning of “fair value” for GAAP financial reporting purposes. PEIGG felt it appropriate to make modifications to its guidelines to ensure compliance with FASB 157.

Definition of Fair Value
The new PEIGG Guidelines have adopted the GAAP definition of fair value, viz. “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Further elaboration is provided by the Guidelines as follows: “The objective is to estimate the exchange price at which hypothetical willing marketplace participants would agree to transact in the principal market, or lacking a principal market, the most advantageous market. No matter which market is deemed most appropriate, fair value is the estimated ‘exit price’ in that market.” [Read More]