After two years of work, the Private Equity Investment Guidelines Group (PEIGG) issued new valuation standards in December. The venture industry issued a collective yawn.
PEIGG’s guidelines urge fund managers to evaluate and monitor investments based on the best estimate of their fair market value. That is, to carry an investment at the value that two willing parties would agree to pay for it if it were sold today, rather than at a valuation based on the portfolio company’s last round of venture capital. The standards were designed by the group’s 18 members to eliminate inconsistencies in measuring fund performance.
“It’s a good goal, but it’s hard to get people to implement the guidelines,” says Dick Kramlich, co-founder and general partner at New Enterprise Associates.
Even the National Venture Capital Association has refused to endorse the guidelines. The 150 investors who gathered for an NVCA-sponsored lunch in San Francisco in the first week in December discussed PEIGG’s proposals, but chose not to take a stand on the issue.
“There’s a lot of good there, but the board is still discussing the issue and hasn’t formed a position yet,” says Jeanne Metzger, NVCA’s vice president for business development and public affairs. The NVCA is not likely to take a stand until its next meeting in March, Metzger says.
In addition, NVCA chairman-elect Jim Breyer, who’s also managing partner with Accel Partners, has expressed doubts that the private equity industry will be quick to adopt the guidelines.
The guidelines ask firms to report valuations on a quarterly basis to their limited partners and to create semi-independent valuation committees that would help establish standards for their respective general partnerships; the general partner would still calculate the actual valuation.
Firms that co-invest in a single portfolio company are asked to confer and then come up with a single valuation for that company. The guidelines were developed over the course of two years by venture capitalists, limited partners and industry consultants.
The cause of concern, among LPs in particular, is the fear that investment firms will write-up investments without a third-party transaction to validate that write-up. There is also the problem of using any number of standards to come up with a fair market value for a private company.
“It is hard to see how [the proposed standards] would ever get us to the goal of consistency,” says Susan Woodward of Sand Hill Econometrics, a consulting firm in Palo Alto, Calif.
For more information on the guidelines, see www.peigg.org.