Demand for robust independent valuations up in Asia

GROWING levels of private investment into the Asia-Pacific region are driving demand for independent valuations and, progressively, third-party valuations - building upon the already increasing need for more robust and timely valuation data, following the global financial crisis.

General partners (GPs) - who manage private investment funds, such as hedge funds and private equity funds - rely on valuations for their investment decisions. But, increasingly, limited partners (LPs) - who invest in such funds - are also demanding transparent, reasonable and consistent valuations on an ongoing basis to make informative asset allocation decisions.

Taking a closer look at this issue are international investment bank Houlihan Lokey, independent mergers and acquisitions intelligence service Mergermarket, and Mergermarket's publishing, market research and events division Remark.

In a special newsletter on valuations in the Asia-Pacific released on Wednesday, they noted the growing phenomenon in this part of the world. Markets in the Asia-Pacific have been deepening and diversifying - offering hedge funds a wealth of opportunities to complete successful trades.

Their data showed the region growing in terms of hedge fund and private equity allocations, as dry powder levels reach new records, and investors planning to increase investments throughout 2014.

And, as a result, their newsletter noted, sound valuation frameworks - incorporating formal governance committees, well-documented policies and procedures, and the appropriate personnel independent of the investment decision-making process - will be needed going forward.

GPs trying to raise their next fund but lacking well-thought-out valuation policies and procedures, and without a valuation specialist in place, could find it difficult to attract LPs, particularly large cornerstone investors.

Dan O'Donnell, Houlihan Lokey's head of Valuations for Asia-Pacific, commented: "While this phenomenon has been prevalent in the US and European markets for the last few years, we are seeing Asia-based investors increasing their demands on GPs. If you are a new or growing fund that is thinking about attracting a broader base of LPs or winning a mandate from the large institutional LPs based in the US or Europe, this is an issue that needs to be addressed early on."

There is also an increasing preference for third-party valuations, especially for investment firms that don't have the resources and expertise to perform robust valuations that are independent of the investment decision-making process.

While there is a cost involved in obtaining a true valuation opinion - from a third-party valuation advisor performing the analysis and calculating a fair value from a perspective independent of the investment manager - it pales in comparison with the potential cost of getting a valuation wrong and losing stakeholder trust, the newsletter noted.

Still, there are challenges to obtaining robust valuation data in this part of the world.

Cindy Ma, Houlihan Lokey's global head of Portfolio Valuation, says: "Markets in Asia are still maturing and lack the breadth of the United States or Europe. Transparency is often an issue, and business practices can also come into question. As such, the biggest challenge to performing an accurate, fair valuation on an asset in Asia-Pacific, particularly in the region's emerging markets, is gaining access to quality and reliable information from which to base valuation conclusions on.

"Locating this information, especially from third parties, requires a much more intense approach than in more developed markets as questionable accounting practices in countries across the region can provide an opaque picture of an asset or a company's true financial condition or operational performance," she added.