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July 29, 2023

How to value private assets

David Larsen has been at the forefront of alternative assets valuation policy for several decades. He is managing director at Kroll, which was acquired by Duff & Phelps in 2018, and advises many of the largest alternatives institutions on private equity transactions and valuations policy. He has been vice-chair of IPEV – the International Private Equity and Valuations Board; and he is a member of the International Valuations Standards Council (IVSC). 

In this podcast with Ross Butler of Linear B Group, David explains how managers should approach valuation in times of high volatility, providing a strong defence of why fair value is in the best interests of both managers, investors and the wider alternatives market, and insider’s view into the latest accounting standards changes and their implications for private equity valuations. 

In this episode of the Fund Shack private equity podcast, we look at the core concept of fair value, which David Larsen defines as the amount one would receive in an orderly transaction. He emphasized the significance of market participant assumptions and elucidated the challenges of applying fair value to illiquid assets, a prevalent scenario in alternative investments. Throughout our conversation, the pivotal role of valuation professionals in accurately assessing fair value and the role of transparency in aiding investors to make well-informed decisions remained at the forefront.

We explore the role of fair value in the context of economic downturns, such as recessions or depressions. David Larsen illuminated the crucial aspect of transparency that fair value accounting brings to the table, helping to mitigate asset allocation imbalances. We also tackled the misconception that fair value was the root cause of the 2008 financial crisis, clarifying that fair value rules are designed for orderly transactions, not fire-sale pricing.

In the latter part of our engaging conversation, we delved into recent developments in fair value accounting, particularly a noteworthy change introduced by the Financial Accounting Standards Board (FASB). This change disregards contractual restrictions on equity securities when determining fair value, a decision that sparked skepticism from David Larsen. He laid out the unintended consequences and complexities this alteration introduces, especially for limited partners who report under US accounting principles.

Overall, this episode of the Fund Shack podcast offers a comprehensive exploration of fair value accounting’s profound implications for the private equity, venture capital and alternative investment landscape. It illuminates the challenges and intricacies involved in valuing assets transparently and accurately, providing valuable insights for professionals navigating this dynamic and critical field.