Deloitte Fund Directors Valuation Conference march 2015

January 2015

Deloitte Valuation ConferenceValuation for AIFMs

March 2015

Deloitte Valuation ConferenceFund Directors:Valuation and related risks

Conference Agenda

Legal Framework

© 2015 Deloitte Tax & Consulting 3

Fund’s directors: General framework of valuation chainWhat are the source of requirements regarding valuation duties?

No existing specific framework for valuation outside 2013 Law for

AIFMs, merely professional standards

Soft laws

Hard laws

• 2010 law

• 2007 law

• 2013 law

• 1915 law

• Civil Code

• ALFI: Code of conduct

• OECD: Principles of corporate governance

• AIMA: Guide to sound practices for hedge funds valuation

• IOSCO: Principles for valuation of hedge funds and

principles for valuation of collective investment schemes

• INREV guidelines

• RICS valuation - professional standards and valuer

registration scheme

• EVCA: Handbook of professional standards

• General principles of law and market practices…


Fund’s directors: General framework of valuation chainOutline of general duty relating to valuation

(Third-Party) Delegate

Fund’s Governing Body

Investor

• Valuations: Performs valuation according to fund’s valuation procedures and policies and report to fund’s governing body

• Determines/approves fund’s proper valuation procedures and policies and make changes as needed

• Valuations: May appoint internal committee or external (third-party) delegate and ensure oversight

• Subscribe for fund’s units through contractual arrangement

• Depending upon legal form, general meeting appoints fund’s governing body and acts as controlling body

• Valuations: Must be able to trust valuation used for individual assets and NAV

= Accountable to investors (corporate mandate / salaried agent)

= Accountable to fund (contractual basis)

« Obligation de moyens »

= Non-contractual liability


Fund’s directors: General framework of valuation chainOutline of main valuation aspects for AIFs

Fund’s Governing Body AIFM

Investors

AIF

[SPVs]

Portfolio of investments

Requirements:• Applies reasonable care, skill and

diligence and acts honestly in the best interest of investors

• Determines/approves AIF’s proper valuation procedures and policies

• Oversees appropriateness and implementation of valuation procedures and policies by AIFM

• Ensures existence and respect of escalation measures to tackle valuation issues

• Liaises with auditors and experts to obtain guidance

Additional duties for AIFM introduced by 2013 Law, i.a.:

• Establishes and periodically reviews appropriate and consistent valuation procedures (asset class basis), including escalation process

• Performs independent valuation internally or delegates to an independent external valuer

• Continuously monitors independent external valuer

• Discloses to investors valuation and NAV

Ultimately responsible towards investors for proper valuation of

AIF’s assets

Responsible towards AIF/indirectly towards investors for the proper valuation

of AIF’s assets

Delegation of valuation function does not shift liabilities


Values for professional and proper behaviour Understanding of valuation procedures and oversight on valuation chain

Valuation Procedures

Due Diligence

Delegation

Approval

Oversight

• Determines/approves general valuation framework / policies• Ensure appropriateness and implementation of valuation procedures and policies

• Day-to-day valuation to valuation experts: Internal committees comprising valuation experts External (third-party) delegate(s): third-party expert(s), AIFM (delegating or not to

independent external valuer(s))

• Carries out proper due diligence for selection of valuation experts, be it internal or external

• Carries out proper and effective oversight on above valuation experts once appointed and their proper implementation of valuation procedures and policies

• Ensures valuation policies and procedures defined at fund’s inception are adequate throughout the lifecycle of the fund depending upon assets under management

• Reviews valuations and approve/endorse results

Law

s an

d in

dust

ry g

uide

lines

rem

ain

quite

bro

ad in

as

sess

ing

how

the

to m

eet t

his

resp

onsi

bilit

y in

pra

ctic

e

Fund’s governing body to determine granularity

Fund’s governing body = Ultimately responsible towards fund’s investors

© 2015 Deloitte Tax & Consulting

Complexity of fund’s directors functionIllustrative director position

Fund 3Non-regulated

Fund 2AIF

Fund 1Non-UCITS (part II) fund

Structured products portfolios

Director

Sub-fund 1.1 Sub-fund 1.2

Hedge funds portfolios Real Estate Private Equity Private Debt

• Different type of funds

• Different investment strategies

• Complex investment structures

• High volumes (number of lines)

• Diversity of products, methodologies, etc.

Directors

face many

difficulties

1. Major valuation risks are properly identified

2. Sound valuation governance is implemented

3. Controls to mitigate identified risks are designed

4. Valuation oversight is exercised

5. Actions are taken for escalated issues

Directors

should

therefore

ensure…

7

0

0 .5

1

1 .5

2

2 .5

3

3 .5


Valuation RisksRisk identification framework

Fund

Portfolio

Investment

Structuring

Valuation

Fund

Portfolio

InvestmentStructuring

Valuation

• Open-ended vs. close-ended• Regulated vs. non-regulated• Prospectus stipulations

• Investment strategy• Portfolio concentration

• Direct vs. indirect• Complexity of investment

structure

• Valuation model• Availability and quality of inputs• Level of subjectivity

• Nature of investment• Liquidity• Investment characteristics

Low High

Low High

Low High

Low High

Low High

Level Description Risk Assessment(illustrative)

Conclusion(illustrative)

Regulated close-ended private equity fund (minority stakes)

Open-ended UCITS fund (listed equities)

Risk Scores (illustrative)

• Private equity fund: 4/5

• UCITS fund: 2/5

Valuation Function

Valuation Committee

Senior Management

Governance FrameworkOversight of the valuation Function

Board of Directors

Fund

Compliance Risk Investment Finance

• Independence vis-à-vis investments• Members include:

o CFO, CRO, CCOo Internal of external experts

• Establishes and enforce detailed valuation policies and procedures

• Define information required to exercise oversight

• Execute valuation policies and procedures

• Implement controls• Manage and supervise

valuation function

• Dictate general valuation framework

• Oversight of valuation function

• Responsible for valuation results

• Valuation comply with: oprospectusoLaws and

regulationsoPolicies and

procedures

• Contribute information / investment knowledge required by the valuation process

• Risks identification / monitoring

• Check Impact of risks on valuations

Direct reporting line


10

Internal valuation

competence?

Sufficient internal

resources?

Potential conflict of interest?

Possible undue

influence?

OK

Yes

Yes

No

No

Hire internal valuation expert?

No

No

Improve process

governance?

Yes

Yes

Yes

Yes

Implement segregation of duties?

Yes

Advisor competence?

No

Select valuation advisor?

Yes

No

No

Yes

Advisor capable to

deliver?

Advisor independence

?

Yes

OK

Yes

No

No

Governance FrameworkKey questions to set up a valuation function

Capability

Capacity

Independence

Conclusion

Internal External

1

2

2

1 Valuation preparation assistance

2 Independent valuation review

But is scope appropriate?

© 2015 Deloitte Tax & Consulting


ConclusionDirectors responsibilities

To mitigate valuation risks, fund directors can rely on:

but…

…it is not possible to eliminate valuation risks

Valuation processes Valuation resources

…to face complex valuation cases, directors can…

→ Governance → Controls

→ Internal → providers

Receive training Seek assistance

Directors are responsible towards fund investors

Therefore…

To increase valuation

knowledge and capability to

detect issues

To obtain external expert

valuation opinions on

complex matters

…and promote enhanced investor disclosures

Fund Directors – Valuation and Related RisksPanelists

Jérôme AlmérasManaging Partner, Cube Infrastructure Fund

Jason HowardDirector, EQT Services UK Ltd.

Cliff LangfordOwner, Real Estate Director Services S.à.r.l.

Ingrid DubourdieuPartner, D. Law


Thank you for listeningIf you have any questions or comments, please contact [email protected]

Key contacts

Pierre MassetPartner – Corporate Finance Leader+ 352 451 452 [email protected]

Strategy & Corporate FinanceJoachim Heukmes Director – Corporate Finance+ 352 451 452 [email protected]

Strategy & Corporate Finance

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Deloitte Fund Directors Valuation Conference march 2015

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