Independent Portfolio Valuation: The Independent Portfolio valuation service is a relatively new business area where companies have their illiquid assets valued by some third-party evaluator. This was born from the need of financial institutions to have transparency in their asset valuations as well as a slew of regulatory moves of which FAS 157 has been the latest. Also owing to the present doldrums in the market, independent valuations serve to reassure institutional investors as well.
Growth Drivers:
· Regulatory Changes Driving Demand (FAS 157): Demand for independent portfolio valuation services continues to be positively affected by increased regulatory scrutiny of corporations, a shift toward fair value accounting principles, increased awareness of and sensitivity to conflicts of interest and the globalization of corporations. In the US, Financial Standards Accounting Board (FASB) Statements Nos. 141 and 142, 123(R), 157, and 159 are a few examples of statements that require valuation expertise. Effective November 15, 2007, FASB mandates that assets be measured at "fair value", described as "the price that would be received if those assets are sold today". Here the companies need to determine the fair value of their hard-to-value securities (level 3 assets), which do not even have a market trading comparable. Valuing such investment has always been difficult, and with the introduction of FAS 157, these level 3 assets have to be valued at today’s prices. This requires specialized valuation advisory services, so that the valuations numbers get the clearance from auditors.
Growth Drivers:
· Regulatory Changes Driving Demand (FAS 157): Demand for independent portfolio valuation services continues to be positively affected by increased regulatory scrutiny of corporations, a shift toward fair value accounting principles, increased awareness of and sensitivity to conflicts of interest and the globalization of corporations. In the US, Financial Standards Accounting Board (FASB) Statements Nos. 141 and 142, 123(R), 157, and 159 are a few examples of statements that require valuation expertise. Effective November 15, 2007, FASB mandates that assets be measured at "fair value", described as "the price that would be received if those assets are sold today". Here the companies need to determine the fair value of their hard-to-value securities (level 3 assets), which do not even have a market trading comparable. Valuing such investment has always been difficult, and with the introduction of FAS 157, these level 3 assets have to be valued at today’s prices. This requires specialized valuation advisory services, so that the valuations numbers get the clearance from auditors.
Companies in the financial services space such as investment banks, hedge funds, private equity funds, etc., will be the most affected as they hold significant amount of Level 3 assets. FAS 157, coupled with the credit turmoil, should have a positive impact on the demand for the independent evaluations. With the introduction of FAS 157, PE and hedge funds can provide comfort to their investors, auditors, and fund managers by seeking independent estimates of the fair values for Level 3 assets.
· Alternative Assets: Alternative asset classes (like investments in arts) continue to flourish as many hedge funds are setting up specialized funds focusing on the same. These asset classes are difficult to value sometimes as they contain illiquid assets; which has led to firms and investors requesting independent valuation on their portfolio.
· Sarbanes-Oxley - Limiting Auditors on providing certain non-audit services: Provisions of the Sarbanes-Oxley Act of 2002 limit an accounting firm’s ability to provide certain non-audit services (including valuation or appraisal services, fairness opinions) to its audit clients. These restrictions, together with the perceived conflicts of interest when auditors provide valuation services to their audit clients, provide independent portfolio valuation firms with a competitive advantage over public accounting firms. This has led to evolution of new financial service class called “Portfolio Valuation Firms”.
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