PRINT THIS PAGE 22/02/2005. Source: SJ Berwin. 
But a consultation recently launched by the European Private Equity and Venture Capital Association (EVCA) and the French and British national associations should make the task a little easier.
The three associations have, until now, had different sets of guidelines. In recognition of the need to conform their practices – for the benefit of fund managers and investors – and to take account of International Accounting Standards and developing practice, a single set of guidelines is now proposed. These standards will adopt "fair value" as the starting point – a concept that has increasing currency in international accounting practice.
At the heart of the draft guidelines (which have been published for consultation until the end of February) is an assumption that investments will be valued based on the amount for which they could be sold, assuming knowledgeable, willing parties in an arm’s length transaction.
That clearly raises some difficult questions about valuation methodology, and the guidelines are mainly concerned with identifying and describing various ways to identify "fair value". These include the cost of investment, earnings multiples, net assets and (with some caution) discounted cash flow (of either the underlying business or the investment).
In all cases, however, there is an acknowledgement that subjective judgements have to be made, and that in some cases an estimate of fair value would be unreliable. In those cases, unless there is evidence of impairment, the investment should be reported at its previous carrying value. The draft guidelines also include helpful guidance on which methodology would be most appropriate for a particular investment.
The guidelines should prove very useful in themselves, although responses to the consultation will no doubt produce a range of reactions to the detailed proposals. But, in any event, this joint initiative is a very important step forward for the European industry, which should lead to wider agreement and consistency on a very vexed question.
The final draft of the valuation guidelines from the EVCA/AFIC/BVCA is available to read below.
Click here to view consultation document (pdf 461kb) You need Adobe Acrobat to read this document. If you do not have it, you can download it free from www.adobe.com/products/acrobat/readstep.html
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on its services to the private equity industry please contact Simon Witney in its London office +44 (0)20 7533 2222 or visit their website at www.sjberwin.com
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