Reaction to last month’s release of new valuation standards by the Private Equity Investment Guidelines Group (PEIGG) remains tepid, at best.
The PEIGG’s guidelines urge fund managers to evaluate and monitor investments on the best estimate of their fair market value. That is, to carry an investment at the value that two willing parties would agree to pay for it if it were sold today, rather than at a valuation based on the portfolio company’s last round of venture capital. The standards were designed by the group’s 18 members to eliminate inconsistencies in measuring fund performance.
“It’s a good goal, but it’s hard to get people to implement the guidelines,” said Dick Kramlich, co-founder and general partner at Baltimore-based New Enterprise Associates.
Even the National Venture Capital Association has refused to endorse the guidelines. The 150 investors that gathered for an NVCA-sponsored lunch in San Francisco last week discussed PEIGG’s proposals, but did not take a stand on the issue.
“There’s a lot of good there, but the board is still discussing the issue and hasn’t formed a position yet,” said Jeanne Metzger, NVCA’s vice president for business development and public affairs.
In addition, NVCA chairman-elect Jim Breyer, who’s also a managing partner with Accel Partners in Palo Alto, Calif., has expressed doubts that the private equity industry will be quick to adopt the guidelines. The NVCA is not likely to take a stand until its next meeting in March.
The guidelines ask firms to report valuations on a quarterly basis to their limited partners and to create semi-independent valuation committees that would help establish standards for their respective general partnerships; the general partner would still calculate the actual valuation.
Firms that co-invest in a single portfolio company are asked to confer and then come up with a single valuation for that company. The guidelines were developed over the course of two years by venture capitalists, limited partners and industry consultants.
Nonetheless, the cause of concern, among limited partners especially, is the fear that GPs will write up investments without a third-party to validate it.
“Most venture firms are more conservative than that,” Metzger argued.
There is also the problem of using any number of standards to come up with a fair market value for a private company.
“Determining a current value is a real challenge,” said Susan Woodward of Sand Hill Econometrics, a consulting firm in Palo Alto, Calif. “The PEIGG blessed just about all known valuation approaches as appropriate in some circumstances, and emphasized that it did not intend to constrain the judgement of general partners. It is hard to see how this would ever get us to the goal of consistency.”