Whether you are a mutual fund, a hedge fund, or a pension fund, there is a heightened focus on the procedures and methodologies used to value illiquid and complex securities. Investors, Limited Partners, and the SEC are very focused on the fair value of investments, whether it impacts the trading price in the fund or disclosures in the financial statements.
This issue underscores the importance of using well-reasoned valuation methodologies and having appropriate governance over internal and external valuations. This governance should include well-documented valuation methodologies, policies, procedures, internal controls, and periodic third-party reviews.
Changes to the methodology or qualitative adjustments over time are often warranted, but they should be well-documented, reviewed, and approved by an independent oversight valuation committee.
Don't wait for market participants or the SEC to raise questions, be proactive in controlling your valuation process to avoid economic pitfalls.
