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Portfolio Valuation

Valuations of fund portfolios should always be performed by parties that are independent from the fund managers.

Outside valuation is especially important for illiquid assets, not only because of the need for independent assessment, but because few companies have the in-house expertise to accurately value assets that lack liquidity.

Placing a value on restricted stock or certain “one-off” derivatives is not something most people do every day. At Pluris Valuation Advisors, it’s our core competency.

Compliance Crackdown

The SEC is intensifying its scrutiny of fund valuations. Chief compliance officers, fund managers, fund administrators and outside auditors all face potential liability for inaccurate valuations. As a result, senior-level executives receive more pressure to ensure that valuations are accurate.

In one recent case, a significant overvaluation of fund assets led to criminal penalties for the portfolio manager and a cease-and-desist letter to the auditor. The message is clear. Accurate valuations of portfolios are a necessity — and the best way to ensure accurate valuations is through an independent, impartial third party.

Why Pluris?

Pluris professionals have significant experience valuing illiquid securities.

Through our affiliation with SecondMarket, we have access to extensive capital market expertise, which is crucial when calculating the fair value of exotic or illiquid securities.

In addition, our proprietary LiquiStat™ database provides us with real-world examples of “fair value,” which was originally defined by the Financial Accounting Standards Board (FASB) in Concepts Statement No. 7 as, “The amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.”

ASC 820 (FAS 157), issued in fall 2006, raised “fair value” regulations to Level A GAAP and brought financial accounting standards on restricted-stock valuation in line with SEC ASR 113.  As detailed in the guidelines released by the SEC, and incorporated in ASC 820 by reference, the following valuation methods for restricted stock are likely to be considered inappropriate:

  • Valuing restricted stock based on current market quotations without a discount
  • Valuing restricted stock at cost
  • Failing to reflect differences in restrictions as differences in discounts
  • Using a constant discount percentage or dollar amount, regardless of security quality or market conditions
  • Starting with the discount at purchase and amortizing it over time

With the rejection of these methods, the only solution is to value each security individually. Use of real-world market data helps provide valuations for equities, derivatives and convertible securities that are accurate and defensible.

For more information on our financial reporting valuations, contact Pluris today.

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