ASC 820 Private Equity

During the past couple of decades, endowment funds, retirement plans, and funds managed by not-for-profit organizations significantly increased their exposure to alternative investments such as private equity and hedge funds. These alternative investments became popular investment asset classes because they had low correlations with the rest of the market and were used to diversify large investment portfolios. For the purposes of meeting ASC 820, valuation of alternative investments such as private equity can be difficult and uncertain due to lack of liquidity and limited pricing transparency, both which pose significant oversight problems to fiduciaries and their auditors.

At DerivActiv, we have valuation processes in place that can simulate alternative investment portfolios and determine valid private equity fair values as required by ASC 820. For more information, call 1-866-200-9012.

ASC 820 Private Equity Funds

Increased transparency in financial reporting is a primary goal of ASC 820, which puts a stringent fiduciary responsibility on managers of public and private investments. Although a manager can accept quarterly valuations from private equity and hedge funds and report them as fair value, independent studies have proven that private equity and hedge funds have a bias toward reporting inflated valuations of ongoing investments. Private equity fund managers have the discretion to report inflated valuations because alternative investments are opaque and thus values are difficult to substantiate, and they have the incentive to report inflated valuations because stronger performance and capital inflows are highly related and fund managers are compensated for the amount of funds they attract and manage. Although it would be very convenient to simply pass along the values from the private equity or hedge fund, best practices suggest that each reporting entity should produce their own fair value valuations or should get timely, accurate information from an independent source that has no financial interest in the valuation. An important and undeniable requirement of ASC 820 is that the reporting entity must now demonstrate that a specific process is being followed in order to determine the fair value of an asset.

Private equity funds and hedge funds are only small part of the hard to value assets that are considered alternative investments and classified under the fair value hierarchy as Level 3. Additional alternative investments include guaranteed investment contracts (GICs), collateralized mortgage obligations (CMOs), collateralized debt obligations (CDOs), some mortgage backed securities (MBSs), real estate funds, and fund of funds, among others.

DerivActiv provides ASC 820 services that can be relied upon by fiduciaries for all types of hard to value investments. Our valuation process mimics the target portfolio by using the same asset classes and risk characteristics as the target portfolio. Using this method we can simulate both the returns and fair value of the target portfolio. Our valuation process has been approved by the auditing community. We help managers meet their fiduciary responsibility under ASC 820 without having to worry about the bias inherent in the numbers provided by the hedge funds themselves.

If you are interested in learning more about ASC 820 (formerly FAS 157), you can download an ASC 820 white paper.