The AMF publishes a summary of its thematic inspections of the valuation of unlisted holdings in private equity management companies
Beginning in April 2018, the Autorité des Marchés Financiers carried out a series of five "SPOT" (Supervision des Pratiques Opérationnelle et Thématique - operational and thematic supervision of practices) inspections, focusing on the valuation of unlisted holdings by private equity management companies. Based on its observations, in addition to the knowledge accumulated over the course of past inspections, it has prepared an assessment of practices identified and reminders of the rules to be applied.
When conducting its SPOT inspections of the valuation of unlisted holdings, the AMF reviewed:
- the organisation and procedures implemented by companies, with particular attention paid to the valuation's independence from the fund managers;
- the practical justification for the valuation of the holdings;
- the valuation of holdings transferred between portfolios;
- the information provided to unitholders about the valuation of the holdings;
- the control system associated with the valuation process.
The AMF found that the procedures governing the valuation of holdings were insufficiently clear with regard to the criteria used to select the valuation methods and their operational implementation. The audit trails retained by the management companies to justify their valuation choices were also incomplete. Lastly, the due diligence checks carried out by external experts based on valuations first calculated by the fund managers were, in a limited number of cases, not properly recorded.
Based on these SPOT inspections, the AMF nevertheless found that the holdings tested were valued at their fair value, as purchase price was maintained for only a limited time post-acquisition. Moreover, the principle of consistent methods was respected: none of the companies inspected changed their valuation method regularly or unjustifiably for the same holding between two valuation dates.
The AMF also noted the following best practices:
- seeking the advice of the investor committee (where such a committee exists) with a view to reducing the risk of conflicts of interest when transferring holdings between funds;
- including in periodic fund management reports details on the valuation methods used and assumptions adopted for each portfolio investment. When information is not provided in periodic reports, referencing a description available elsewhere;
- including in the internal control policy the lessons learned from AMF sanctions concerning private equity management companies.
This new series of SPOT inspections gave rise to follow-up letters. In light of its findings, the AMF will clarify its Position-Recommendation No. 2012-19 in 2019.
About the AMF
The AMF is an independent public authority responsible for ensuring that savings invested in financial products are protected and that investors are provided with adequate information. The AMF also supervises the orderly operations of markets. Visit our website https://www.amf-france.org
AMF Communication Directorate - Christèle Fradin - Tel: +33 (0)1 5345 6029 or +33 (0)1 5345 6028
Head of publications: The Executive Director of AMF Communication Directorate. Contact: Communication Directorate – Autorité des marches financiers 17 place de la Bourse – 75082 Paris cedex 02