August 20, 2019

Recent SEC OCIE examination findings and enforcement actions have sparked a trend of increased scrutiny on fund valuation. Especially with the emergence of digital assets/cryptocurrencies as a new asset class, valuation continues to be an ever-increasing focus area of regulators. Stout recently hosted its’ annual investment fund evaluation event in New York that brought together members of the local investment community and industry experts to discuss these key issues.

The event, moderated by Stout Managing Director Jesse Morton, featured the following panelists:

  • Amit Joshi, Chief Accounting Officer, Apollo Investment Corp.
  • Thomas Friedmann, Partner, Dechert LLP
  • Will Coleman, Director, Technology Advisory Services, Cohen & Co.
  • Jamie Spaman, Managing Director, Stout
  • Matt Rogers, Director and National Leader of SEC and Accounting Advisory Practice, Stout

In this segment, Jaime Spaman and Amit Joshi provided their perspective on how to value Level One assets. Listen to the recording or read the transcription below to get their perspective:



Jesse Morton:

How do you look at whether, L1 assets, Level 1 assets, right, its market price is in an active market. How does that work in practice?

Jamie Spaman:

Yeah, so I think Amit touched on it a little bit that there's a line between Level 2 and Level 3, and when you get to something that you think might be Level 1, things change. A company could go out of favor; trading could start to thin out. You start to get stale prices that aren't traded on from day to day. That's where your valuation policy needs to step in and say, "This is how we're going to evaluate our quotes. Over a period, month to month quote, or whatever it is.

Perhaps the asset starts with a Level 1 asset, goes down to Level 2 and then maybe even ultimately Level 3. Your valuation policy needs to be written in order to handle situations like that where you can evaluate period to period whether this asset should continue to be marked in the same way or do we need to make an adjustment because X, Y, Z, changed.

Jesse Morton:

Are there some parameters you look to, to see whether something is actively or not actively traded. Where do you draw that line or how do you figure that out? Is there a step by step method?

Jamie Spaman:

Not really step by step. I think it's firm by firm. Some firms will look at broker quotes and they'll say, "Well, if we get three broker quotes, that's good. They're all recent, that works for us. Other firms would say, "Well, we want to have five."

Amit Joshi:

I have to add, again, one or two things which I mentioned earlier. Are you getting those broker quotes consistently or not? Because one quarter you might get three and another quarter you might get one. It might start ... It's something you should evaluate at that point that, is it something which is broadly traded or not. 

Then, it also depends on those brokers, right? Some of the things which we evaluate is, are those brokers giving you the amount? Is this the quote where they will do trade with you or not?  Is it just an indication based on their relationship with, the deal team that they've provided you a quote, but if you want to go and transact with them at that price, they're not willing to do those transactions with you. Size also at times becomes important. 

Then, some of it is also, these days you get a lot of feeds from pricing vendors. As you look at some of the pricing vendors, for instance, market partners, you can also get depth from them. Like, okay, they gave you a quote. They might have got it from five, six different sources. Many of them also have a rating system which kind of gives you an idea about how meaningful or how strong this quote is. 

Again, these are the factors which perhaps you should consider. But, again, it goes back to valuation policy, which some of it, which, we'll discuss at a later point that, as you're drafting your valuation policy, you should consider all these factors. You should lay it down. Again, valuation policy is not something which you do it day one of the fund and then it's somewhere lying in your hard drive somewhere. It's something which you should keep evaluating because we are in a dynamic world where things keep on changing. It's very important that you keep revisiting it as a new scenario is coming out.

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