BVCA proposes reporting standard

The UK association is hoping to pave the way for heightened transparency in private equity with proposed changes to portfolio valuation and LP reporting.

The British Venture Capital Association (BVCA) has published a consultation document setting out reporting principles and valuation guidelines for UK private equity and venture capital practitioners which seeks to bolster the UK’s position as a transparent and regulated market for private equity investment.

 

The BVCA first published valuation guidelines over ten years ago, but this is the first time that recommendations have been issued on content, frequency and timing of reports issued by private equity managers for the benefit of their investors.

 

The private equity market downturn has seen a sharp increase in demand for greater clarity and consistency with which investors in the asset class are supplied with fund performance data. The BVCA believes its new guidelines could pave the way for an international reporting standard.

 

'In addition to speaking to the BVCA's 150 members, we also consulted with accountancy firms and VC bodies from around the world,' said Michael Queen, the incumbent chairman of the BVCA. 'We've tried to produce comprehensive and rigorous guidelines that will be applicable worldwide.'

 

The association recommends that reporting documents to limited partners are issued twice a year, within 60 days half way through the financial year of a fund and 120 days at year-end. 

 

The report also makes detailed recommendations on what kind of information about a fund should be provided, and it calls for the value of portfolio investments to be re-assessed semi-annually. Valuations of privately held investments are to be obtained on a fair value basis, with Internal Rates of Return taking into account at least monthly cash flows, fund performance, multiple of investment cost, return on capital and income, all on the assumption that all investments are realised on the date of the reporting. The association also wants GPs to provide investors with a gross IRR on realised as well as unrealised investments, in addition to the overall fund IRR.

 

The valuation guidelines set out in the document are designed to comply with generally accepted accounting principles and are broadly in line with International Accounting Standard 39 (IAS 39), bar certain exceptions such as allowing for quoted market prices to be discounted under certain circumstances, which IAS 39 prohibits .

 

The BVCA, which has been working on the document for over a year, is seeking feedback from industry professionals until January, with a final set of guidelines to be published early next year.