Uniform Valuation Approach for AIF Investment Portfolios

Uniform Valuation Approach for AIF Investment Portfolios

On January 6, 2023 the Securities and Exchange Board of India (“SEBI”) issued a Consultation Paper on a standardized approach to the valuation of investment portfolios of Alternative Investment Funds (“AIF”) under the SEBI AIF Regulations 2012 (“AIF Regulations”). 

What will it take to seek a standardized valuation approach?

Currently, the AIF Regulations focus on disclosures to investors, but do not provide any guidelines on methodologies and standards. This means that AIF managers have the flexibility to adopt any valuation methodologies by disclosing them to investors. The primary discussion point is the need for a uniform approach in valuation methodology to ensure a consistent approach across the AIF industry. The issue was deliberated in a meeting of the Alternative Investment Policy Advisory Committee (“AIPAC”) held in October and November of 2022. Taking into consideration those deliberations, the SEBI believes that a uniform approach to valuation would be beneficial to investors.

To that end, the AIPAC is proposing mandating AIF valuations to be carried out under the guidance of the International Private Equity and Venture Capital Valuation Guidelines (“IPEV Guidelines”) since the IPEV Guidelines provide flexibility in terms of different valuation techniques with respect to the valuation methodology to be adopted by AIFs.

IPEV Guidelines

The IPEV Guidelines provide a framework for consistent, transparent, and objective valuations of private equity and venture capital investments and specify that the valuer should use one or more of the following valuation techniques as of each measurement date (annually, semi-annually, or quarterly), considering market participant assumptions as to how value would be determined:

1. Market approach

• Multiple of an earnings metric or revenue
• Industry benchmarks
• Market prices available for instruments quoted on an active market

2. Income approach, based on discounted cash flows
3. Replacement cost approach

Uniformity regardless of intermediary

Those who have been exposed to valuation principles would accept that these principles are the foundations of Valuation Theory. SEBI has prescribed specific norms for the valuation of certain securities and instruments such as traded securities, money market and debt securities, non-traded equity instruments, convertible debt, warrants, etc. in other SEBI regulations, such as those specified for Mutual Funds under Eighth Schedule of SEBI (Mutual Funds) Regulations, 1996 and SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/10 dated September 24, 2019. Thus, it is essential that the principles/standards of valuation of a particular security are uniform across SEBI regulations irrespective of the type of intermediary.

Independent Valuer requirements

AIPAC is proposing that the independent valuer meet the following criteria:

1. The valuer is registered with the Insolvency and Bankruptcy Board of India (“IBBI”)
2. The valuer has a membership of a professional institute established by an Act of Parliament enacted for the purpose of regulation of a profession such as the Institute of Chartered Accountants of India, Institute of Company Secretaires of India, Institute of Cost Accountants of India, etc. or a CFA Charter holder from the CFA institute
3. The valuer has at least 3 years of experience in valuation of unlisted securities
4. The valuer is not an associate of manager/sponsor/trustee of the AIF

Additionally, for the purpose of the calculation of the Net Asset Value (“NAV”), Category III AIFs shall be required to undertake the valuation of their investment portfolio in unlisted securities by an independent valuer with the criteria listed above.

Reporting requirements

AIPAC is also proposing reporting requirements for independent valuations.

1. Managers of AIFs shall be required to report the valuation based on audited data as of March 31, 2023, to performance benchmarking agencies within 6 months
2. Managers of AIFs shall be required to ensure that the valuation based on audited data of the investee company is reported to performance benchmarking agencies only after the audit books of accounts of the AIF in terms of Regulation 20(14) of AIF Regulations

AIF Manager responsibilities

Furthermore, AIPAC is proposing the following responsibilities of the AIF manager for valuations:

1. Managers of all SEBI registered AIFs shall be required to ensure that the independent valuer computes and carries out the valuation of investments in accordance with the stipulated guidelines
2. The Manager shall be responsible for the true and fair valuation of the investments made by the scheme of the AIF
3. Deviations from the disclosed valuation policy and procedures shall be allowed with disclosure of the documented rationale
4. At each asset level, if there is a deviation of more than 20 percent between two consecutive valuations or a deviation of more than 33 percent in a financial year, the Manager shall be required to inform the investors of the reasons or factors that created such deviation

The Manager shall also be required to disclose the following to the investors of the AIF:

1. Details of the valuation principles
2. Details of changes in the principles, if any
3. Details of changes in accounting policies
4. Details of the impact of the changes in terms of the valuation

Insights from Tony Alfonso, Global Head of Valuation at Apex Group

Apex Group support the adoption of SEBI’s initiative to apply a standardized approach to the valuation of investment portfolios. We provide valuation services to a global client base for their assets in an independent, fair, innovative and efficient manner, all backed by cutting-edge technology.

If you require valuation services for your AIF, please do not hesitate to contact us. Our team of experienced professionals provide comprehensive and reliable valuation services tailored to meet the specific needs of your AIF. We have a deep understanding of the AIF industry and are committed to delivering high-quality and independent valuations that comply with regulatory requirements and industry standards. Contact us today to learn more about our valuation services and how we can assist your AIF.