NNew private equity provisions of the Global Investment Performance Standards (GIPS(r)) have been approved by the Board of Governors of the Association for Investment Management and Research (AIMR), the worldwide sponsor of the GIPS standards. The new provisions will take effect Jan. 1, 2005, although firms are encouraged to adopt them earlier, if possible.
The GIPS standards provide a standardised approach, based on the principles of fair representation and full disclosure, for firms to calculate and report their investment returns - thus allowing investors to compare results from GIPS-compliant firms throughout the world. The GIPS standards are followed by firms in over 30 countries. The GIPS standards are not mandatory for investment firms to adopt, although firms often find that doing so is a competitive necessity.
Joe Kavanagh, president of the Society of Investment Analysts in Ireland (SIAI), the Irish chapter of AIMR, welcomed the provisions. He said it provides much needed guidance to investment managers as to how they can properly evaluate private equity. The proportion of investment by Irish fund managers in private equity remains small, with Kavanagh saying that overall it would be approximately 1 per cent of the average portfolio.
GIPS Private Equity Valuation Principles outline requirements in five areas: input data, calculation methodology, composite construction, disclosure, and presentation and reporting. The provisions state that firms must calculate the annualised Since Inception-Internal Rate of Return (SI-IRR), using either daily or monthly cash flows and the period-end valuation of unliquidated remaining holdings.
Firms must also calculate net-of-fees returns based on defined criteria, and must present both the net-of-fees and gross-of-fees annualised SI-IRR of the fund for each year since inception.
The provisions also require that firms document their valuation procedures and disclose that the procedures are available upon request. Valuations procedures should be reviewed by a qualified person or entity that is independent from the valuer, such as an advisory board or committee.
In addition, the provisions require firms to follow specific principles that establish a broad foundation for valuing private equity assets. The GIPS Private Equity Valuation Principles were created as a first step to help bridge the gap between the different regional valuation guidelines by requiring firms to incorporate the same basic principles at the core of their valuation methodology. The Valuation Principles outline high-level guidelines for valuation, while the various regional guidelines for valuing private equity provide the supporting detail.
AIMR are currently working on including a number of other areas in GIPS, including real estate, and leverage and derivatives provisions.
Ireland was the first country to sign up for GIPS in May 2001, and an oversight body of investment managers, pension fund representatives, investment consultants and third party verifiers, was recently established in Ireland under the joint sponsorship of the Irish Association of Investment Managers and the SIAI. This group gathers the views of local market participants on developmental proposals on the future of the standards and passes them up the line to the global governing body. |
