Deloitte Valuation Conference Introductory session

Transcription

1 Deloitte Valuation Conference Introductory session December 2014

2 Agenda 1 Introduction 2 Overview of 2015 Valuation Conferences Topics 3 Conclusion 2014 Deloitte Tax & Consulting 2

3 Historical Price S&P 500 2,100 1, US Quantitative Easing Japan Quantitative Easing 1,700 1,500 AIFMD CRD IV UCITS V 1,300 Dodd-Frank Act IFRS 13 1, Bank bailouts, failures and mergers EMIR Source: S&P Capital IQ 2014 Deloitte Tax & Consulting 3

4 Trailing Price/Earnings Ratio S&P x 21x 19x 2006 P/E = 17x 2014 P/E = 18x 17x 15x 10 year average 16x 13x 11x Source: S&P Capital IQ 2014 Deloitte Tax & Consulting 4

5 Market Volatility VIX index (S&P 500) Source: Financial Times, FT.com year average Source: Chicago Board Options Exchange 2014 Deloitte Tax & Consulting 5

6 Interest rate environment 10 year US government bond rates 5% 30 year average 5.6% 4% 3% 2% 2.2% 1% Source: S&P CapitalIQ 2014 Deloitte Tax & Consulting 6

7 Investor Survey Investor portfolio allocation to private market assets 6% 12% 26% 46% 33% 82% 20% 41% 34% Three years ago Now Three years from now Source: The Economist Intelligence Unit study f or BlackRock, September % 11-15% 16% Deloitte Tax & Consulting 7

8 Investor Survey Evolving investment allocations 34% 36% 21% 23% 24% 26% 16% Hedge Funds Developed and EM Equity Source: The Economist Intelligence Unit study f or BlackRock, September 2014 Commodities Fixed Income Private Equity Infrastructure Real Estate Directly covered in the conference series Hard to value assets 2014 Deloitte Tax & Consulting 8

9 Investor Survey Perceived challenges to investing in private market assets Access to opportunities 41% Asset pricing and transparency 40% Modelling risk factors and scenarios 37% Understanding regulatory treatment 33% Manager selection and due diligence 30% Liquidity and lock-up periods 19% Fee structures 10% Demonstrating regulated internal governance 6% Source: The Economist Intelligence Unit study f or BlackRock, September 2014 Directly covered in the conference series 2014 Deloitte Tax & Consulting 9

10 Valuation Conferences Agenda 2014 Deloitte Tax & Consulting 10

11 Agenda 1 Introduction 2 Overview of 2015 Valuation Conferences Topics 2.1 Valuation for AIFs 2.2 Sound Valuation in Credit Institutions 2.3 Accounting and Audit Requirements 3 Conclusion 2014 Deloitte Tax & Consulting 11

12 Valuation Issues for alternative investment funds Overview of AIF stakeholders and related requirements Requirements: Directors 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 Investors Fund Requirements: AIFM 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 Fund Administrator Depositary 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 SPVs Target companies 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 2014 Deloitte Tax & Consulting 12

13 Valuation Issues for alternative investment funds Overview of AIF stakeholders and related requirements Requirements: Directors 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 Investors Fund Requirements: AIFM 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 Fund Administrator Depositary 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 SPVs Target companies Requirements: Ensure that appropriate valuation procedures and policies are established for each AIF Verify that periodic valuation of the AIF assets are 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 2014 Deloitte Tax & Consulting 13

14 Valuation matters and related risks Implications for Fund Directors, Conducting Officers & Risk Managers UCITS AIFMD ESMA guidelines Directors Conducting officers Regulatory Framework Risk managers Use of inadequate valuation model Delegation of the valuation function > < Delegation of the responsibility Quality of the valuation process at 3 rd party level (if delegated) Conducting Officers Implementation of valuation policies Approving the valuation methodologies Overseeing the valuation process at a 3 rd party service providers if any: administrator or external valuer ASSET VALUATION 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 2014 Deloitte Tax & Consulting 14

15 Valuation matters and related risks Implications for Fund Directors, Conducting Officers & Risk Managers INDEPENDENCE EXPERTISE ASSET PORTFOLIO MANAGEMENT VALUATION RISK MANAGEMENT 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 2014 Deloitte Tax & Consulting 15

16 Valuation Issues for alternative investment funds Overview of AIF stakeholders and related requirements Requirements: Directors 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 Investors Fund Requirements: AIFM 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 Fund Administrator Depositary 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 SPVs Target companies Requirements: Ensure that appropriate valuation procedures and policies are established for each AIF Verify that periodic valuation of the AIF assets are 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 2014 Deloitte Tax & Consulting 16

17 Valuation for AIFMs The directive requirements in a nutshell Context Context Issues AIFMD Objectives Requirements Valuation alternatives Valuations by fund managers Conflicts of interest Unbiased valuations & transparency Governance & Segregation of duties Internal or external valuation Valuation function Provides assets values for NAV pricing AIFM Valuation 1 External valuer Unlimited liability towards AIFMs in case of negligence Scope of work? (means vs. results) High risk, high fees? Delegation? Yes No 1 External valuer 2 Internal valuation 2 Internal valuation Scale to achieve segregation of duties? Competencies to cover assets diversity Well-defined valuation process Strong governance framework 2014 Deloitte Tax & Consulting 17

18 Valuation for AIFMs The external valuer: Don t get confused Real Estate Report extract Properties values AIFM BoD Co-Investor Appointment Appraiser Conducting Officers Valuation Committee Propco 1 Portfolio Managers SPV Propco 2 RE Funds (close-ended) Value of fund investments? Debt + equity Fund Holding Propco Deloitte Tax & Consulting 18

19 Valuation for AIFMs The external valuer: Don t get confused Private equity AIFM BoD Conducting Officers Valuation Committee Portfolio Managers Appointment Companies values Investment Advisor SPV 1 Advisory services Company A PE Funds (open-ended) Value of fund investments? SPV 2 SPV 3 Company B Company C 2014 Deloitte Tax & Consulting 19

20 Valuation for AIFMs The external valuer: Don t get confused Fund of funds AIFM Funds NAV BoD Conducting Officers Valuation Committee Portfolio Managers Hedge fund 1 Portfolio A Fund Manager Funds NAV Fund of hedge funds Hedge fund 2 Portfolio B Value of fund investments? Hedge fund 3 Portfolio C 2014 Deloitte Tax & Consulting 20

21 Valuation Issues for alternative investment funds Overview of AIF stakeholders and related requirements Requirements: Directors 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 Investors Fund Requirements: AIFM 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 Fund Administrator Depositary 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 SPVs Target companies Requirements: Ensure that appropriate valuation procedures and policies are established for each AIF Verify that periodic valuation of the AIF assets are 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 2014 Deloitte Tax & Consulting 21

22 Valuation: multiple actors involved What questions will we answer? Focus of the next slides NAV calculation process review Management Company Delegation Portfolio Managers Who is the AIFM? BoD Conducting Officers Valuation Committee Responsible for NAV calculation and portfolio valuation of funds Delegation Delegation Central Administrator Independent Valuer Is valuation in-sourced? Central Administrator as valuator? Who does oversight? What synergies between FA and DB? Funds Appoint Valuation oversight Appoint Depositary Auditor How far does due diligence go? Practical solutions options Audit of financial statements 2014 Deloitte Tax & Consulting 22

23 How to be pragmatic? Market practices in terms of valuation oversight Obligations Asset valuation policies & skills Functional split Valuation oversight Escalation procedures Commonly observed practices Per asset class Depositary oversight - Valuation and NAV process - Valuation skills AIFM delegates Portfolio Management Delegation of NAV and valuation - Can be different actors* Risk Management in-sourced 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 * Mainly for non-financial assets 2014 Deloitte Tax & Consulting 23

24 Agenda 1 Introduction 2 Overview of 2015 Valuation Conferences Topics 2.1 Valuation for AIFs 2.2 Sound Valuation in Credit Institutions 2.3 Accounting and Audit Requirements 3 Conclusion 2014 Deloitte Tax & Consulting 24

25 Sound valuation in credit institutions Regulatory impact on valuation processes Daily valuation of trading book OTC Derivatives Collateral measurement Prudent valuation CRD IV CRD IV, EMIR CRD IV CRD IV, IFRS Challenges existing in different areas of operations create requirements for enhanced internal valuation processes 1 Coupon / Formulabased 2 Structured note issuance (e.g. EMTN Programme) Capital Markets Floating Hedging with OTC derivative (TRS or equivalent) 3 Credit facilities Hard-to-measure asset used as collateral (PE, structured, etc.) PB Client 2014 Deloitte Tax & Consulting 25

26 Sound valuation in credit institutions Addressing other stakeholders needs Customers Fair and transparent pricing of assets held in portfolios Potential performance enhancer 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. Governing bodies Accountable for sound business (and risk) oversight Adequate valuation processes provide extra assurance and serve as evidence of sound governance practice Regulators Daily valuation of items in the trading book Counterparty credit risk and CVA Collateral management Prudent valuation Valuation oversight duties for depositaries Shareholders Overpriced products can negatively impact P&L and harm the performance of the institution 2014 Deloitte Tax & Consulting 26

27 Agenda 1 Introduction 2 Overview of 2015 Valuation Conferences Topics 2.1 Valuation for AIFs 2.2 Sound Valuation in Credit Institutions 2.3 Accounting and Audit Requirements 3 Conclusion 2014 Deloitte Tax & Consulting 27

28 Valuation in the context of financial reporting A complex environment Valuation? Financial reporting Scrutiny Auditors Investors Regulators Valuation guidelines IPEV, RICS, INREV, AIMA, IVS Accounting standards GAAP, reporting guidelines Auditing standards ISA 540, IAPN 1000, NT Harmonised, unbiased, transparent and well documented valuation results 2014 Deloitte Tax & Consulting 28

29 Auditing fair values Increasing audit requirements Applicable GAAP, rules and regulations Understand accounting & disclosure requirements Review prospectus, investment policies, investment memos, committee resolutions, agreements, management discussions, etc. Understand the assets / instruments Appropriateness of policies and procedures, operating effectiveness, risk identification, assessment and mitigation Understand the internal controls How to tackle increasing audit requirements? Understand methodologies and models used Appropriate methodology? Main assumptions? Consistency over time? Significant event? 2014 Deloitte Tax & Consulting 29

30 A complex environment Case Study Structure Vehicle Location Applicable framework Issues Pension fund US GAAP; ASC 820 Investors PE Fund SIF LUX GAAP: prospectus (FV) Or IFRS: IFRS 13 GAAP Valuation Reporting SPV S.à r.l. LUX GAAP: cost Audit Requirements Target company Private company IPEV Guidelines 2014 Deloitte Tax & Consulting 30

31 Agenda 1 Introduction 2 Overview of 2015 Valuation Conferences Topics 3 Conclusion 2014 Deloitte Tax & Consulting 31

32 Conclusion 2014 Deloitte Tax & Consulting 32

33 Conclusion A dedicated website for this conference series is available at: Deloitte Tax & Consulting 33

34 Wishing you a very merry Christmas from Deloitte 2014 Deloitte Tax & Consulting 34