The tenth anniversary of the Dodd-Frank Act in July 2020 was hardly cause for celebration among fund managers pondering how to calculate valuations in a summer marked by the coronavirus pandemic. Among its many reforms, the Dodd-Frank Act subjected PE sponsors to reporting requirements requiring valuations as registered investment advisers after removing a critical exemption under the Investment Advisers Act of 1940. That is not all, however, as pressure relating to valuations has grown for PE funds from all sides due to SEC scrutiny, increasing secondary market transactions, risks from sponsor-to-sponsor cross-trades and institutional investor investment allocation requirements. Most PE funds continue to produce valuations internally, but the use of independent valuation firms is slowly becoming more prevalent in the market in response to that pressure. This first article in a three-part series discusses why scrutiny of valuations by investors, auditors, GPs and regulatory agencies has increased of late, prompting greater use of independent valuation firms. The second article
will delve into the rise of independent valuation firms, different scopes of work for engagements and ways managers can choose the right firm to conduct valuations. The third article
will explore the typical process of working with and overseeing a valuation firm, as well as approaches to resolving disagreements over valuations. See our two-part series on valuations in the second quarter of 2020 during the coronavirus pandemic: “Private Debt and Equity
” (Jul. 14, 2020); and “Real Estate, Energy and Other Asset Classes
” (Jul. 21, 2020).