New research suggests PE firms manipulate valuations

BVWireIssue #148-3
January 21, 2015

Soon-to be-released research suggests that private equity funds are not doing valuations properly, reveals a report in the International Business Times. PE firms may have “effectively embellished their returns to make them look more attractive to pension managers,” says the report.

Against theory: A key element of PE firms’ marketing pitch is that their investments overall are less volatile, or less risky, than the S&P 500 index. The new research challenges that position. “The industry’s assertion contradicts classic financial theory, which stipulates that highly levered investments are inherently more volatile than less-leveraged investments,” says investment banker Jeffrey Hooke (FOCUS), a co-author of the new study. “Our study casts doubt on that marketing ploy.” Hooke worked on the new study with researchers from George Washington University

"The investments in private companies may only appear safer because the private equity managers are in control of how the investments look on paper, not because the actual value of the assets [is] more stable or better performing,” he told IBT.

Last year, BVWire pointed out that scrutiny would increase on PE fund valuations due to concerns by the Securities and Exchange Commission over alleged overvaluations. The SEC implemented an audit program and stepped up its enforcement actions. For more information, see the article in the August 2014 issue of Business Valuation Update, “Best Practices for Fund Valuations Amid Ongoing SEC Crackdown” (subscription required).

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