Ignoring the Valuation Problem Won’t Make It Go Away –

My son is 9 years old and I still have to ask him if he brushed his teeth before I take him to school in the morning. He groans about being pestered, but I know he’ll thank me for it when he’s older. It is with that same good intention that I ask yet again if you’ve given any more thought to adopting the valuation standards proposed by the Private Equity Industry Guidelines Group (PEIGG).

It’s an issue that won’t go away. In our second annual report card about GP performance, limited partners decried the industry’s lack of consistency in valuations. (See page 32.) “Valuations are all over the board,” one LP told Senior Editor Jerry Borrell. “We can have two managers with the same investment and two very different valuations.”

The problem is significant enough that the International Limited Partners Association endorsed PEIGG’s valuation standards at its annual meeting in September. And the lack of consistency is one of the reasons that William Donaldson, chairman of the Securities & Exchange Commission, is considering some level of regulation for the private equity industry.

The valuation problem is like plaque on teeth: You can ignore it for a long time, but sooner or later the neglect is going to lead to cavities and land you in the dentist’s chair. Better to address the issue now, while you still have a say in how it’s addressed. If you keep putting it off or pretending it’s not a problem, you’ll end up under Donaldson’s drill.

-Lawrence Aragon