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BVCA: valuations are 'too conservative'

Contrary to critics’ claims that private equity houses mislead investors by overvaluing their assets, GPs are if anything ‘too conservative’, according to research from trade body the BVCA.

General partners are not over-optimistic in their fund valuations and are in fact “typically too conservative in the early years of a fund’s life”, according to research from UK trade body the British Private Equity and Venture Capital Association.

The results offer a rebuke to claims GPs routinely overstate a fund’s value to lure investors into future funds, the BVCA said.

In a universe of around 150 closed funds from its in-house database of UK firms, the BVCA examined the evolution of funds’ interim internal rates of return to their final realised values. The findings showed fund valuations typically normalised at around four to six years

What the cynics fail to appreciate is that there are no prizes in private equity for overvaluing an asset

Anthony Cecil

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This could be the result of management fees representing a larger proportion of drawdowns during a fund’s early years—or because GPs only move away from ‘at cost’ valuations over time, the report surmised. 

Some argue the report's findings should not come as a surprise. Anthony Cecil, KPMG's head of auditing for private equity, said: “What the cynics fail to appreciate is that there are no prizes in private equity for overvaluing an asset.

“There is always a certain amount of unjustified cynicism in relation to GPs' valuations as unquoted asset valuation requires significant professional judgment to be applied,” he added.