Valuation governance on the agenda of AIFM’s boardroom discussions
By Elena Moisei - Business Valuation Board member of IVSC* and Senior Manager of Transactions and Corporate Finance at EY
Over the past decade since the approval of the Alternative Investment Fund Managers (AIFM) Law of 12 July 2013, Luxembourg's regulatory landscape for AIFMs has undergone significant changes, particularly concerning the roles and responsibilities of key stakeholders such as the board of directors and senior management. With recent publications from the European Securities and Markets Authority (ESMA) and the Commission de Surveillance du Secteur Financier (CSSF) emphasizing the importance of the asset valuation process quality, there is a growing focus on enhancing the transparency and quality control checks in the valuation process.
 

The board of directors plays a crucial role in overseeing valuation governance within AIFMs, aiming to ensure the accuracy, reliability, and transparency of fund valuations. As such, several means can be used by boards to bolster valuation governance within AIFMs: 

  • Comprehensive valuation policy – the board should establish a clear and comprehensive valuation policy, detailing the methodologies, assumptions, and procedures for valuing different asset types within the funds they manage. This policy should align with regulatory requirements and industry best practices and undergo board review and approval. 

  • Internationally recognized valuation standards – the board should ensure that valuation methodologies adhere to internationally recognized standards, such as the International Valuation Standards (IVS) set by the International Valuation Standards Council (IVSC), an independent standard-setting body. IVS serves as the key guide for valuation professionals globally to underpin quality, consistency, and transparency in valuations, leading to better-informed decisions for shareholders.  

  • Independent valuation committee – the creation of an independent valuation committee within the board, composed of experts, is recommended. This committee can oversee the valuation process, offer insights on complex matters, and provide regular reports to the board regarding valuation changes, challenges, and exceptions.  

  • Review of valuation inputs and outputs – the board should scrutinize the reliability and appropriateness of inputs used for valuations, including market data from third-party providers. They must address any biases or conflicts of interest in these inputs and assess the accuracy and consistency of valuation results. Also, to be noted that the frequency of fair value reporting should be aligned with the net asset value (NAV) reporting date. It is worth mentioning that the IVS 100 framework now includes section 30 Quality Control, where in paragraph 30.3 it is stipulated that “Quality controls apply throughout the valuation process and may include but are not limited to review of the scope of work, data reviews, model validations, recalculation, backtesting and fact-checking.” This means that the board of directors should put in place a robust process of quality control aiming to avoid errors and mistakes in fair value reporting. 

  • Conflicts of interest management – the board should implement controls to manage and mitigate conflicts of interest that could influence the valuation process, whether they originate internally or involve third parties. 

  • Third-party oversight – in case any part of the valuation process is outsourced to independent valuers, the board should closely monitor and oversee their activities. 

  • Scenario analysis and sensitivity testing – in cases of complex or distressed assets, the board can request scenario analysis and sensitivity testing to evaluate how changes in assumptions or market conditions impact valuations, enhancing the understanding of potential risks.  

  • Regulatory compliance – the board should ensure that the valuation process complies with relevant regulatory requirements, such as the Alternative Investment Fund Managers Directive (AIFMD) in the European Union. 

Also, the board should implement periodic audits or reviews to assess the effectiveness of the valuation governance framework and ensure transparent communication with investors about the valuation process. In order to have the necessary knowledge and expertise to grasp valuation methodologies and challenges, the board members should do regular training which will enhance their ability to make informed decisions.  

In summary, the board's role in valuation governance for AIFMs involves the establishment of robust policies, independent oversight, transparent reporting, and a proactive approach to managing risks and conflicts. In addition, putting in place quality control checks that comply with internationally recognized valuation standards allows for the assessment of the valuation. These measures collectively contribute to the delivery of accurate, reliable valuations that align with the interests of stakeholders.


* The IVSC sets the IVS, a global, principles-based framework for best practice, ensuring valuations are reliable, credible and comparable worldwide. Drafted by independent standard-setting boards comprising 120+ experts from 42 countries, and with 200+ member and sponsoring organizations, including the World Bank, the IVSC’s influential network is committed to advancing global valuation standards and protecting the public interest.  



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