The PwC report said the study found that a valuation committee (or the equivalent) is becoming the normal response to the demands placed on asset managers’ valuation processes; this true across sectors and a firm’s Securities and Exchange Commission registration status.
According to PwC, all managers polled have valuation committees, and the information provided to the committee and the board is largely consistent across funds. The top four documents provided to the valuation committees of traditional funds are the fair value listing, stale price reports, pricing error reports, and lookback testing. The four documents most commonly given to the board are vendor due diligence reviews, illiquid reports, pricing errors/tolerance reports, and 2a-7 compliance reports.
Sixty-eight percent of managers cited a lack of reliable data from pricing services as a key valuation risk, their boards have adopted two distinct approaches to managing this risk through oversight of pricing vendors. Some 48% have direct or indirect oversight of vendors, while an almost equal percentage (47%) have delegated this responsibility to management.
“It is important for valuation committee members to bring objectivity and good judgment to the deliberations and recognize that their charge is to be fair to all stakeholders,” PwC researchers wrote. “Among other things, this means that the committee does not always seek the highest valuations, or conversely, does not strive to be overly conservative.”
Some 94% of alternative asset managers also have valuation committees, as do 88% of real estate firms and 60% of private equity asset managers (an additional 10% of private equity firms are considering creating such a committee).
Market Volatility, Changing Liquidity Risks to Valuation
Other findings from the PwC Asset Manager Valuation study include:
- Large majorities of mutual funds, hedge funds and real estate funds cite market volatility and changing liquidity as the greatest valuation risks. Private equity firms, which hold largely illiquid assets, are more concerned about obtaining appropriate market comparables.
- 94% of alternative firms have a valuation committee to manage and oversee valuation policies and procedure and 74% of hedge funds and 60% of private equity funds said that the CFO, who often is responsible for valuation, sits on the committee.
- Dodd-Frank will require many hedge funds, private equity firms and other alternative managers to become registered investment advisers and therefore, subject to SEC examination. “This increases the need for them to upgrade governance to ensure the independence and objectivity of their valuation processes,” PwC observed.
“By implementing sound valuation processes, ensuring the right people are involved, and providing oversight groups with the information they need to carry out their responsibilities, asset managers in all sectors can better manage their risks and operate more effectively in an environment of increased scrutiny by regulators and investors,” PwC concluded. “In doing so, they will achieve the key goal of ensuring that they manage their business and reputational risks and that valuations are fair to all stakeholders.”
PwC conducted a Web-based survey of more than 50 firms in four core sectors of the asset management industry: traditional/registered investment firms (traditional), alternative investment firms, private equity/venture capital firms, and real estate asset managers. Two of the firms that participated manage less than $500 million in assets, while 12 manage more than $100 billion.