New Private Equity Provisions Added to Global Investment Performance Standards.

Business Editors

CHARLOTTESVILLE, Va.--(BUSINESS WIRE)--Jan. 6, 2004

New private equity provisions of the Global Investment Performance Standards (GIPS(R)) have been approved by the Board of Governors of the Association for Investment Management and Research, the worldwide sponsor of the GIPS standards. The new provisions will take effect Jan. 1, 2005, although firms are encouraged to adopt them earlier, if possible.

The GIPS standards provide a standardized approach, based on the principles of fair representation and full disclosure, for firms to calculate and report their investment returns - thus allowing investors to compare results from GIPS-compliant firms throughout the world. The GIPS standards are followed by firms in over 30 countries. The GIPS standards are not mandatory for investment firms to adopt, although firms often find that doing so is a competitive necessity.

"Private equity has become an increasingly important part of mainstream investor portfolios, but it is an asset class not fully addressed by the GIPS standards in the past," said Alecia Licata, AIMR vice president for investment performance standards. "The new private equity provisions are a comprehensive set of globally applicable provisions that promote the comparability of returns and increase transparency to investors. These provisions are specifically targeted toward fund-raising activities, not for ongoing client reporting. They will enable prospective clients to better evaluate a fund's performance."

The GIPS Private Equity Valuation Principles outline requirements in five areas: input data, calculation methodology, composite construction, disclosure, and presentation and reporting. The provisions state that firms must calculate the annualized Since Inception-Internal Rate of Return (SI-IRR), using either daily or monthly cash flows and the period-end valuation of unliquidated remaining holdings. Firms must also calculate net-of-fees returns based on defined criteria, and must present both the net-of-fees and gross-of-fees annualized SI-IRR of the fund for each year since inception.

Other reporting requirements include several multiples: total value to paid-in capital, cumulative distributions to paid-in capital, paid-in capital to committed capital, and residual value to paid-in capital.

The provisions require that firms document their valuation procedures and disclose that the procedures are available upon request. Valuations procedures should be reviewed by a qualified person or entity that is independent from the valuer, such as an advisory board or committee.

The provisions also require firms to follow specific principles that establish a broad foundation for valuing private equity assets. The GIPS Private Equity Valuation Principles were created as a first step to help bridge the gap between the different regional valuation guidelines by requiring firms to incorporate the same basic principles at the core of their valuation methodology. The Valuation Principles outline high-level guidelines for valuation, while the various regional guidelines for valuing private equity provide the supporting detail.

The Valuation Principles recommend firms use a fair value basis, which is consistent with international financial reporting principles, and introduces a valuation hierarchy of fair value methodologies to assist firms in deriving a reasonable value for a private equity investment.

"The critical difference for private equity from other (quoted) asset classes is that the measurement of performance is hugely dependent on interim valuations of underlying securities, which are based on relatively subjective methodologies," said Carol Kennedy, chair of AIMR's Venture Capital and Private Equity Subcommittee and senior partner at Pantheon Ventures Limited in the UK. "Historically there has been a lack of commonality of valuation practices because of the differing evolution of the industry across the world. What we have done through the private equity provisions of GIPS is to provide high-level principles of valuation to help encourage convergence of practices at a global level. The final provisions and principles recognize how difficult the objective valuation of private equity investments can be. They allow flexibility in the methodology used but at the same time require more extensive disclosure and explanation. And frankly, where a basis other than fair value is used, justification is required."

The provisions were developed by the multi-national Investment Performance Council, the oversight body for GIPS that is coordinated by AIMR but includes investment-measurement experts from many associations and organizations throughout the world.

These provisions are complementary to the movement occurring the world over towards developing more commonality among standards. In Europe, the private equity industry associations (EVCA, BVCA and AFIC) are working together and guidelines have recently been produced by groups in the US (PEIGG) and Australia (AVCAL). All of these groups were involved during AIMR's six-month consultation process for the provisions.

About AIMR:

AIMR is the 68,000-member professional association that established AIMR Performance Presentation Standards (AIMR-PPS(R)) in North America in the early 1990s and led development of their global equivalent, the GIPS standards, in the late 1990s. But AIMR is perhaps best known as the worldwide administrator of the prestigious Chartered Financial Analyst(R) curriculum and examination program. AIMR's membership includes 55,000 CFA charterholders in more than 100 countries, and 127 local professional societies in 46 countries. Headquartered in Charlottesville, Virginia, USA, AIMR also has offices in London and Hong Kong.