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December 2014

Deloitte Valuation ConferenceIntroductory session

© 2014 Deloitte Tax & Consulting 2

1 Introduction

2 Overview of 2015 Valuation Conferences’ Topics

3 Conclusion

Agenda


700

900

1,100

1,300

1,500

1,700

1,900

2,100

2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: S&P Capital IQ

Bank bailouts,

failures and

mergers

UCITS V

US Quantitative Easing

EMIR

IFRS 13

1 2 3

AIFMD CRD IV

Historical PriceS&P 500

Japan Quantitative Easing

Dodd-Frank Act


11x

13x

15x

17x

19x

21x

23x

2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: S&P Capital IQ

Trailing Price/Earnings RatioS&P 500

2006

P/E = 17x

2014

P/E = 18x

10 year average

16x


-

10

20

30

40

50

60

70

80

2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Chicago Board Options Exchange

Market VolatilityVIX index (S&P 500)

10 year average

20

14.3

Source: Financial Times, FT.com


1%

2%

3%

4%

5%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: S&P CapitalIQ

Interest rate environment10 year US government bond rates

30 year average

5.6%

2.2%


82%

41%34%

12%

33%

20%

6%

26%

46%

Three years ago Now Three years from now

0-10% 11-15% 16%+Source: The Economist Intelligence Unit study f or BlackRock, September 2014

Investor SurveyInvestor portfolio allocation to private market assets

https://www.blackrock.com/institutions/en-zz/literature/brochure/driving-returns-fig-research-report-en-gb.pdf


16%

21%

23%

24%

26%

34%

36%

Hedge Funds Developed and EMEquity

Commodities Fixed Income Private Equity Infrastructure Real Estate

Source: The Economist Intelligence Unit study f or BlackRock, September 2014

Investor SurveyEvolving investment allocations

Hard to value assetsDirectly covered in the

conference series



41%

40%

37%

33%

30%

19%

10%

6%

Access to opportunities

Asset pricing and transparency

Modelling risk factors and scenarios

Understanding regulatory treatment

Manager selection and due diligence

Liquidity and lock-up periods

Fee structures

Demonstrating regulated internal governance

Source: The Economist Intelligence Unit study f or BlackRock, September 2014

Investor SurveyPerceived challenges to investing in private market assets

Directly covered in the

conference series



Valuation ConferencesAgenda


1 Introduction


3 Conclusion

Agenda

Valuation for AIFs

Sound Valuation in Credit Institutions

Accounting and Audit Requirements

2.1

2.2

2.3


Valuation Issues for alternative investment fundsOverview of AIF stakeholders and related requirements

Directors

Requirements:

• Ultimately responsible for AIF

assets proper valuations

• Ensure oversight of the valuation

function

• Ensure existence and respect of

escalation measures to tackle

valuation issues

• Liaise with auditors and valuation

experts to obtain guidance

AIFM

Requirements:

• Ensure specific administrative and

accounting procedures are in place

for the proper calculation of the net

asset value of the AIF

• Ensure existence of remedial

procedures for incorrect NAV

calculation / pricing issue

• Act as external valuer if appointed

by the AIFM

Fund Administrator

Requirements:

• Ensure that appropriate valuation

procedures and policies are

established for each AIF

• Verify that periodic valuation of the

AIF assets is consistently performed

in accordance with the terms of the

offering documents, valuation

policies and procedures

• Control that valuation policies are

periodically reviewed

• Understand the valuation models

Depositary

Investors

Fund

SPVs

Target companies

Requirements:

• Perform the valuation function

internally or delegate to an external

valuer

• Establish and periodically review

appropriate and consistent valuation

procedures and escalation process

• Account for the proper and

independent valuation of AIF’s

assets



Directors

Requirements:




function



valuation issues



AIFM

Requirements:









by the AIFM

Fund Administrator

Requirements:





AIF assets are consistently

performed in accordance with the

terms of the offering documents,

valuation policies and procedures




Depositary

Investors

Fund

SPVs

Target companies

Requirements:



valuer






assets


Risk

managers

ASSET

VALUATION

Regulatory

Framework

• UCITS

• AIFMD

• ESMA guidelines

• …

• Use of inadequate valuation

model

• Delegation of the valuation

function

> <

Delegation of the responsibility

• Quality of the valuation

process at 3rd party level (if

delegated)

Valuation matters and related risksImplications for Fund Directors, Conducting Officers & Risk Managers

Directors Conducting

officers

Conducting Officers

• Implementation of valuation policies

• Approving the valuation methodologies

• Overseeing the valuation process at a 3rd party service

providers if any: administrator or external valuer

Board of Directors

• Understanding the valuation methodologies

• Being comfortable with underlying assumptions of the

methodology

• Ensuring that the valuation methodology adopted is

appropriate for each asset class

• Intervene in case of manifest error or “hard to value”

asset

• Liaise with auditors and valuation experts


EXPERTISE

• Board of Directors must have appropriate skills in order to

understand and approve the asset valuation process

• Board of Directors must have a sound asset class knowledge

INDEPENDENCE

• Risk and Valuation functions must be independent of the portfolio

management from a functional and hierarchical perspectives

• Remuneration of the Risk and Valuation functions must be

independent of the performance of the operating units

• One Conducting Officer overseeing the portfolio management

function

• At least one Conducting Officer overseeing the Risk and

Valuation functions

PORTFOLIO MANAGEMENT

• Independence from Portfolio management doesn’t mean that

the Risk and Valuation functions cannot be supported

• Provides the relevant data to perform valuations

RISK MANAGEMENT

• Interaction with the different parties involved in order to

understand the portfolio management and decision-making

process

• Review of Marked-to-Model valuations

• Critical review of the policies and valuation methodologies,

including OTC derivatives

EXPERTISE

INDEPENDENCE PORTFOLIO

MANAGEMENT

RISK

MANAGEMENT

Valuation matters and related risksImplications for Fund Directors, Conducting Officers & Risk Managers

ASSET

VALUATION



Directors

Requirements:




function



valuation issues



AIFM

Requirements:









by the AIFM

Fund Administrator

Requirements:












Depositary

Investors

Fund

SPVs

Target companies

Requirements:



valuer






assets


Valuation function• Provides assets’ values for NAV

pricing

• Unlimited liability towards AIFMs in

case of negligence

• Scope of work? (means vs. results)

• High risk, high fees?

Context

Context Issues AIFMD Objectives Requirements Valuation alternatives

Internal or

external

valuation

Unbiased

valuations &

transparency

Conflicts of

interestValuations by

fund managers

Governance &

Segregation of

duties

External

valuer

Internal

valuation

• Scale to achieve segregation of

duties?

• Competencies to cover assets’

diversity

• Well-defined valuation process

• Strong governance framework

1

2

Valuation for AIFMsThe directive requirements in a nutshell

AIFM

Valuation

NoYes

Delegation?

External valuer Internal valuation1 2


Debt + equity

Real Estate

Valuation for AIFMsThe external valuer: Don’t get confused

AIFM

RE Funds

(close-ended)

Portfolio Managers

BoD

Conducting Officers

Valuation Committee

Fund

Holding

Co-Investor

SPV

Value of fund

investments?

Propco 1

Propco 2

Propco 3

AppraiserAppointment

Properties’

valuesReport

extract


Private equity


Investment

Advisor

Appointment

Advisory

services

SPV 1

SPV 2

SPV 3

Company

A

Company

B

Company

C

AIFM

PE Funds

(open-ended)

Portfolio Managers

BoD

Conducting Officers

Valuation Committee

Value of fund

investments?

Companies’

values


Fund of funds


Fund

Manager

AIFM

Fund of hedge

funds

Portfolio Managers

BoD

Conducting Officers

Valuation Committee

Value of fund

investments?

Hedge

fund 1

Hedge

fund 2

Hedge

fund 3

Portfolio A

Portfolio B

Portfolio C

Funds’

NAV

Funds’

NAV



Directors

Requirements:




function



valuation issues



AIFM

Requirements:









by the AIFM

Fund Administrator

Requirements:












Depositary

Investors

Fund

SPVs

Target companies

Requirements:



valuer






assets


Focus of the next slides

Valuation: multiple actors involvedWhat questions will we answer?

Management

Company

Auditor

Responsible for NAV

calculation and portfolio

valuation of funds

Funds

BoD

Conducting Officers

Valuation Committee

Central

Administrator

Independent

Valuer

Depositary

Audit of financial statements

NAV calculation process review

Valuation

oversight

Appoint

• Who is the AIFM?

• Is valuation in-sourced?

• Central Administrator as

valuator?

• Who does oversight?

• What synergies between FA

and DB?

• How far does due diligence

go?

• Practical solutions options

Delegation

Delegation

Appoint

Portfolio

ManagersDelegation


Obligations Commonly observed practices

Valuation oversight

Functional split

Escalation procedures

• AIFM delegates Portfolio Management

• Delegation of NAV and valuation

- Can be different actors*

• Risk Management in-sourced

Asset valuation policies & skills

• Per asset class

• Depositary oversight

- Valuation and NAV process

- Valuation skills

• Tripartite Operating Memorandums (AIFM, FA,

Depositary)

• AIFM oversight on NAV and valuation (if

delegated)

• Depositary due-diligence on AIFM and

valuation delegates

• Formalized in Operating Memorandum

• Procedures and monitoring tools

• Depositary involved

How to be pragmatic?Market practices in terms of valuation oversight

* Mainly for non-financial assets


1 Introduction


3 Conclusion

Agenda

Valuation for AIFs



2.1

2.2

2.3


Sound valuation in credit institutionsRegulatory impact on valuation processes

Daily valuation of

trading book

Challenges existing in different areas of operations create requirements for enhanced

internal valuation processes

Prudent valuationOTC Derivatives

Capital Markets

Structured note issuance

(e.g. EMTN Programme)

Hard-to-measure asset used as collateral (PE, structured, etc.)

Credit facilitiesHedging with OTC

derivative (TRS or equivalent)

PB Client

Floating

Coupon / Formula-based

1

3

2

Collateral

measurement

CRD IV, IFRSCRD IVCRD IV, EMIRCRD IV


Sound valuation in credit institutionsAddressing other stakeholders’ needs

Limited capacity to

challenge prices provided

by counterparts and blind

reliance on those values

for hard-to-measure

assets is no longer a

viable option.

• Fair and transparent

pricing of assets held in

portfolios

• Potential performance

enhancer

• Accountable for sound

business (and risk)

oversight

• Adequate valuation

processes provide extra

assurance and serve as

evidence of sound

governance practice

• Overpriced products can

negatively impact P&L and

harm the performance of

the institution

• Daily valuation of items in the trading book

Counterparty credit risk and CVA

• Collateral management

• Prudent valuation

• Valuation oversight duties for depositaries

Customers

Regulators

Governing bodies

Shareholders


1 Introduction


3 Conclusion

Agenda

Valuation for AIFs



2.1

2.2

2.3


Valuation in the context of financial reportingA complex environment

GAAP, reporting guidelines ISA 540, IAPN 1000, NT2013-04IPEV, RICS, INREV, AIMA, IVS

Valuation

Accounting standards Auditing standards

?

Financial reporting Scrutiny

Auditors

Regulators

Investors

Valuation guidelines

Harmonised, unbiased, transparent and well documented valuation results


Understand

the internal

controls

Understand

methodologies and

models used

Understand

accounting &

disclosure

requirements

Understand

the assets /

instruments

Auditing fair valuesIncreasing audit requirements

Applicable

GAAP, rules and

regulations

Review prospectus, investment

policies, investment memos,

committee resolutions,

agreements, management

discussions, etc.

Appropriateness of

policies and

procedures,

operating

effectiveness, risk

identification,

assessment and

mitigation

Appropriate

methodology?

Main

assumptions?

Consistency over

time? Significant

event?

How to tackle

increasing audit

requirements?


Investors

PE Fund

SPV

Target

companyPrivate company

S.à r.l.

SIF

Pension fund

Structure Vehicle Location Applicable framework

US GAAP; ASC 820

LUX GAAP: prospectus (FV)

Or IFRS: IFRS 13

LUX GAAP: cost

IPEV Guidelines

Issues

GAAP

Valuation

Reporting

Audit

Requirements

A complex environmentCase Study


1 Introduction


3 Conclusion

Agenda


Conclusion


Conclusion

A dedicated website for this conference series is available at:

http://www2.deloitte.com/lu/en/pages/financial-

services/events/deloitte-valuation-conferences.html

http://www2.deloitte.com/lu/en/pages/financial-services/events/deloitte-valuation-conferences.html


Wishing you a very merry Christmas from Deloitte

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