Tax return and document management services for individuals in California, USA.
Fund Administration, PLUS Valuation Assistance
We provide fund administration services for small funds (here is a fun little video), and valuation assistance for funds of all sizes (more information below.)
What makes us different? We encourage fund management to preform valuations in-house, with outside valuation expert assistance. We assist with the fund’s investment valuations and provide support to management with preparing and supporting Level 3 investment valuations.
Why can’t management get help from other fund administrators or their auditors? Most fund administrators lack valuation expertise and are afraid of the risks associated with valuation assistance. Auditors, furthermore, are not allowed to disclose their Level 3 fair value assessment calculations, because this would impede their independence. This leaves fund management with only two options: To do it themselves, or get independent valuations from outside valuation firms.
A third option exists: in-house valuations, with assistance from a valuation consultant.
Although independent valuations (fully outsourced) are commonly obtained by large investment funds, they are also very expensive and often result in a duplication of tasks.
When you prepare valuations in-house, we can provide you with the guidance you need to insure compliance with financial reporting and auditing standards.
We spoke to Massimo Messina, valuation specialist on the AICPA’s PE/VC Accounting and Valuation Task Force at the recent ASA Annual Fair Value Conference in San Francisco. He supports the idea that investment funds perform their valuations in-house. The AICPA assured the private equity and venture capital industry that the new guidance would still allow them to perform their valuations in-house. The guidance to be issued by the Task Force will help fund-management do a better job, and promote some consistency between the requirements and demands of the different audit firms when they audit Level 3 investments.
Level 3 Investment Valuation Assistance
Rudi Prozesky, owner of Capital Coast, is a valuation specialist who has years of experience working with private equity funds from all over the world. He noticed that small private equity firms are particularly troubled by audit firms when it comes to Level 3 investment valuations. Fund administrators and auditors are unable to help these small private equity firms. Most fund administrators lack expertise, and steer clear of the risks involved with valuations, and auditors need to protect their independence.
We found that fund management is very capable of valuing investments for investment and exit strategy purposes, but can benefit from assistance with converting those valuations for use in USGAAP/IFRS financials. We help with exactly that. Here are a few tasks that we can perform for you, to make life easier:
- Define and document the unit of account, and market participants for each investment holding.
- Calculate and support discount rates, and liquidity discounts.
- Perform or assist with cash burn calculations.
- Triangulate fair value based on the application of various valuation approaches and methods.
- Allocate enterprise value down the waterfall. A contingent claims analysis is performed to determine a probability-adjusted allocation of the enterprise value to the equity and debt holders of the company.
- Assist fund management with the preparation of calibration calculations for each investment. We found calibration calculation assistance to be a great way for us to add value, and more and more audit firms are requiring these calculations for Level 3 fair values.
- Compile financial statements and prepare draft financials and disclosure notes.
What are calibration calculations?
In calibration calculations, we use the initial entry price paid by the fund for the investment as a starting point to evaluate the reasonableness of a fair value for the investment calculate at a later date. Because this purchase price was an entry price, a little bit of work needs to be done to confirm that it was actually at fair value, i.e., it was not a distressed sale, or single investor specific synergies were excluded, etc.
Valuation analysts should base calibration calculations on changes in investment-specific, as well as industry and market-based elements.
In essence, if:
- the cost price of the investment was considered to be its fair value the day a fund purchased it,
- the economy strengthened since then and the industry is flourishing,
- comparable companies are trading at significantly higher multiples, and
- the investee company has been hitting all its targets
–we expect the investment’s fair value today to be significantly higher.
Fund management now needs to perform a detailed analysis of each variable to quantify this new fair value for financial reporting. Calibration calculations obviously get more complicated when elements such as the above have moved in different directions.
Management should also investigate the reasons why things have changed, and document their findings. In the end, investment funds need to be able to determine the impact of these changes on the portfolio company’s opportunities, risks, and probability of success.
From the above, it is clear that calibration calculations are an extension of a fund’s already performed due diligence, monitoring, and strategic decision-making activities. We therefore recommend that fund management perform calibration calculations with the assistance of outside valuation experts to ensure its proper documentation and audit friendliness.
Calibration calculations should always be used for private equity valuations for financial reporting purposes.
Contact us for assistance with calibration of your investment valuations.
ecoPayrollAccounting consists of CPA-outsourced payroll services for small businesses in California, USA.
ecoAccounting is a CPA-provided bookkeeping, accounting, CFO, tax, and consulting service tailored for small businesses. We also help you to go paperless.
Accounting for Your Fast-Moving Business
There has never been a more exciting time to be in accounting–No joke! Electronic document management, cloud computing, and various new accounting apps are providing opportunities that were previously only available to big accounting firms and big businesses. Now, they are available to anyone who is tech savvy.
The choices can, however, be overwhelming. We have tested a number of these tools, from cloud computing to electronic file sharing, digital signatures, payroll management, and backup services. We found that some platforms are still not quite “there” yet, and that some are significantly better than others. We would love to help you find and implement the best ones for you.
Online accounting is not for everyone. Some prefer to get financial statements in a newspaper-style report–telling it like it is, big picture, with highlights of areas of concern and interest. We would recommend this option for most small business owners. They have more important things to focus on than routine bookkeeping and accounting matters. Being a Jack-of-all-trades in your own business could easily keep you from attending to critical success factors. Here is a hint: There are more important things than keeping track of expenses and filing documents, so leave that to us.
Medium-sized businesses generally have a greater need for real-time data access. For these clients, we generally recommend cloud computing with shared transaction capturing responsibilities. Some transactions are captured by point-of-sale software, some by your employees, and some by us. Desktop accounting software can also be utilized where online accounting software lacks sufficient functionality.
Owners of medium-sized businesses also need to give careful consideration to segregation of duties for protection against embezzlement. We can help with that!