SFAS 157 – Fair Value Measurements

“Flat is the new up.” (Steve Zelin, Blackstone Group)

Given the current environment, including illiquid and/or distressed markets for many assets, it can be critical for fund management, investors and auditors to get third party, independent valuation assistance to determine the fair value of underlying assets.

SFAS 157 is a new accounting standard that provides guidance on how to measure the “fair value” of an entity’s assets (underlying investments in the case of private equity, venture capital and hedge funds) including appropriate markets, pricing inputs and reliance, market hierarchies, market participants, implementation dates, etc.   Historically, assets were typically carried at cost and adjusted either to lower of cost or market or upon a related transaction. Now, they must be marked to fair value (under rules designed to provide some level of consistency) on no less than an annual, and in most cases a more frequent basis, for investor and financial reporting purposes.

The implementation of SFAS 157, and the need to provide investors with transparency on a timely basis, has spurred many alternative investment fund managers to bring in third-party valuation experts to value their assets or review their internal valuation work. The valuation of illiquid securities (typically Level 3 assets) can be a particularly challenging project depending on the assets and the time available to fund management. 

Empire has strong experience valuing alternative investments on behalf of private equity firms, venture capital funds, hedge funds and family offices. In its over 20 years of experience, Empire has valued all levels and types of equity-related investment assets, as well as most types and levels of debt securities, including portfolios of consumer, corporate and mortgage notes and bonds. In recent years, we have undertaken valuation engagements for clients ranging up to 35 assets per quarter. This work requires high quality review and analysis, and the ability to act within very short timeframes. Empire’s approach to using teams of analysts that remain consistent from quarter to quarter allows the process to flow smoothly and reliably for our clients.

Empire has performed over 75 engagements on behalf of funds with $100mm - $75bn of assets under management, with between one and 40 entities valued per fund. We have also provided valuations of investee debt and equity holdings for major Family Offices ($1bn and over).

Empire’s Report Level Services

Empire tailors its services to provide the right level of assurance for each fund client. These services run the gamut from full valuation opinions and “positive assurance” concerning a fund’s analyses to “negative assurance” letters indicating the fund’s values are not unreasonable. This work can involve more than one level of assurance, as funds look to Empire to do full valuations of their more complex and difficult assets but look for “review” level reports for their other assets.

We work interactively with fund clients to understand each asset’s current standing and outlook, explain our thinking and methods, arrive at conclusions based on those and other inputs, and produce understandable and reliable reports.

Empire has been through hundreds of valuation technical reviews over the years with Big Four and major regional audit firms, as well as the SEC. This gives us the experience to know what is needed to facilitate these reviews and effectively respond to questions that get raised. We are also well known by, and maintain relationships with, current reviewers at the major audit firms. Our experience includes defending our opinions before the SEC, the IRS and other governmental agencies when necessary.

For information on Empire’s services in this area please feel free to contact Mark Shayne, Managing Director or Scott Nammacher, Managing Director.