Many stand-alone private equity managers are wondering whether they will be required to use independent valuation firms for determining the value of holdings, according to a memorandum from Willkie Farr & Gallagher LLP. Investment managers who handle publicly traded companies are now generally using independent firms to help with valuations, but neither U.S. GAAP nor industry guidelines require it.

More scrutiny: PE valuations have come under increasing review by both investors and regulators, according to the memo, for the following reasons:

• More frequent fundraising cycles, requiring the presentation of interim performance data and IRR of “active” funds;

• Continued focus on valuation practices in SEC examinations conducted by the Office of Compliance Inspections and Examinations (OCIE);

• Prevalence of sponsor-to-sponsor sales of portfolio companies, which can highlight the variance in valuations; and

• Institutional investors continuing to have exposure to portfolio companies through more than one private equity firm and seeking consistency across their various managers.

PE fund managers who use independent valuation firms typically have them assist with the valuation of Level III assets (assets for which pricing inputs are unobservable and there may be little, if any, market activity), says the memo. They’re also engaged to support Sarbanes-Oxley compliance and demonstrate that there are strong internal controls.

Extra: The AICPA has a task force working on a practice aid that focuses on valuing holdings of PE and venture capital funds. Look for a draft later this year.