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Northern Trust helps clients cope with valuation headaches for alternative investments

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Private equity investors are coping with the challenges of valuation and audit of alternative assets, but a majority say their documentation process may not meet new accounting standards for hard-to-price and hard-to-value assets, according to an informal survey by Northern Trust.

Northern Trust conducted the survey of its global custody clients during a recent webinar on alternative assets valuation. More than 50 institutional clients, with a median investment of USD2 billion in private equity and alternative assets, attended the webinar to discuss valuation issues with experts from Northern Trust and the investment firm Duff & Phelps. The interactive, anonymous survey helped participants to better understand their peers’ experiences and to benchmark themselves to best practices in the marketplace.

“Clients are facing an increasingly complex landscape with regard to fair valuation rules for which minimal process guidance is provided,” says Paul Finlayson, Alternative Assets Product Manager at Northern Trust, who participated in the webinar. “As part of our consultative approach to our business, we are working with our clients and their auditors to assist the client in meeting their accounting and administration needs.”

Private equity investors were surveyed to gauge their due diligence process, their level of comfort with the valuations provided from their alternative asset managers and their experience in dealing with auditors. Survey results indicated that investors recognise the need for improving internal processes. About 70 per cent described assessment of their investment as informal, with room for improvement to meet the criteria set by the Financial Accounting Standards Board. About half of the respondents anticipated greater need for documentation of these processes for future audits under ASU 2009-12, the latest update on FASB’s guidelines for hard-to-value assets.

The survey also found that private equity funds presented the most difficult challenge in gathering information to meet ASU 2009-12 requirements: 64 per cent of investors said they struggle to obtain sufficient information on private equity investments, while 48 per cent of real estate investors and 36 per cent of hedge fund investors said the same.

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