Ten years after first drawing up an valuation and reporting standard, the British Venture Capital Association (BVCA) has published what it describes as “tough new revisions” to its Reporting and Valuation Guidelines that it hopes will encourage greater transparency and procedural consistency in the asset class.
The guidelines, which are in accordance with US GAAP and other international accountancy standards, are designed to allow comparability of funds operating in different markets around the world.
According to the BVCA, the new document’s most significant revisions are the recommendation of a “more robust and rigorous process when making valuations; improved valuation methodology for management buyouts and more explicit guidance on what information should be reported to investors.”
The guidelines broadly incorporate the “Level One” provisions of the Reporting Guidelines of the European Private Equity & Venture Capital Association (EVCA) and include an excerpt, relating to the Internal Rate of Return performance measure, from the EVCA Valuation Guidelines. A spokesperson for the BVCA said the primary difference between the EVCA and BVCA standards as they currently stand is that the BVCA guidelines are compatible with international accounting standards. EVCA is expected to incorporate these standards in the near future.
“While the previous set of valuation guidelines undoubtedly served the industry well, developments over recent years have given rise to the need for an update,” said BVCA chairman Richard Green in a statement. “Most important is the ongoing need to be able to demonstrate to investors and potential investors in private equity the soundness of the industry’s valuation practices.”
Top of the list of reforms was a change to valuation methods. The BVCA maintains that the best measure to valuing private equity investments is “fair value”. According to the report, “investments should be reported at fair value at the reporting date, except in situations where fair value cannot be reliably measured. In such situations the investment should be reported at the carrying value at the previous reporting date.” Fair value is defined as the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
BVCA chairman Richard Green said the industry’s growth made the need for reforms more necessary. “The industry has become substantially larger, broader and more complex; financial accounting and reporting has increasingly embraced value-based measures over cost-based measures, particularly in the context of financial instruments; the range of valuation measures and techniques has expanded in order to cope with new industry sectors and the use of more complex financial structuring.”
The spokesperson for the BVCA said that the existing guidelines were currently used by 85 per cent of British venture capital and private equity firms, with all BVCA members employing the standards. “We expect our members to start using the revised methods by the August 1st, when the new guidelines take effect.”
A full summary of the BVCA Reporting and Valuation Guidelines can be found at www.bvca.co.uk.