In-House Portfolio Valuations Is the Reward Worth the Risk?

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In-House Portfolio Valuations Is the Reward Worth the Risk?

Download the Guide

November 03, 2022

There is a lot at stake when conducting a portfolio valuation, but even more so when it comes to valuing Level 3 investments in house. When companies weigh the pros and cons of conducting these valuations internally, it becomes clear that the potential pitfalls are significant. In order to avoid this downside, many asset managers have outsourced their valuations.

Outsourcing portfolio valuations provides savvy financial managers with a number of advantages over conducting them in house.

Download our guide to learn more about why outsourcing is the right choice and how to choose the right provider.

The Risks of Doing In-House Valuations

All asset managers need to take steps to ensure that they have established written policies and procedures to determine the fair value of its holdings, including creating and following independent valuation policies and procedures, consistently applying the appropriate approach as documented and disclosed to investors, and following industry best practices and practice guides. 

Even if asset managers are able to establish such a comprehensive process for conducting their portfolio valuations internally, they still need to address several significant considerations that are inherent with this course of action. These include the following:

  • Lack of Transparency Creates a Negative Public Perception: Managers that keep their valuations in house leave themselves open for skepticism from wary stakeholders and to questions about potential conflicts of interest.
  • Diminished Investor Confidence: Potential investors who are unknowing or dubious about internal methodologies/objectives are less likely to become actual investors.
  • Strain on Internal Resources: Taking investment teams away from their money-management duties in order to focus on portfolio valuations is an impractical and unproductive use of resources.
  • Multiple Rounds of the Audit Process: The portfolio valuation audit process can be lengthy, which diverts employee focus/productivity over a sustained period.
  • Inability to Meet Timelines/Turnarounds: For public companies, valuations are often performed quarterly. Many privately held companies are ill equipped to adequately meet these deadlines. 

As a result of these issues, in-house portfolio valuations face increased scrutiny from all parties, including auditors who check the consistency of methodologies throughout the entire valuation process, the accuracy of calculations, and the credibility of judgments and assumptions. Scrutiny will also be increased from investors who are looking for as much transparency as possible, and the SEC, who could perform an audit of the valuation as part of a routine exam, an industry-specific sweep, or as the result of an investor complaint.

Why to Outsource Your Valuations

Utilizing a third-party valuation advisor eliminates virtually all of the issues that arise when conducting portfolio valuations internally. For example:

  • Concerned about transparency and diminished investor confidence? Partnering with an independent valuation firm increases the legitimacy of the process and removes any potential conflict-of-interest questions and builds trust for investors.
  • Concerned about the strain on internal resources and multiple rounds of the audit? A third-party provider allows investment teams to focus on investment management and frees them from the rigors of the audit process.
  • Concerned about an inability to meet timelines/turnarounds? A capable third-party provider will be able to meet any timeline necessary on a recurring basis (quarterly, monthly, semi-annually, etc.).

Want to learn more? Download our comprehensive guide that dives deeper into portfolio valuations, the risks of completing them in house, and how to choose the best possible third-party valuation advisor.