Fair value measurement issues in private equity funds

Abstract

The fair value has been for long time object of controversial debates not only among the accounting literature but also among practitioners and financial institutions. In spite of this, it has been recognized by the International Account Standards Setters as the most relevant measurement technique able of better representing all the complex phenomena that affected our economy in the last decades. Among these there are the globalisation, the increasing use of financial instruments, the complexity of corporations and business models and the tendency of firms of growing through external growth by mergers and acquisitions. The purpose of this thesis is to analyse the issues arising during the fair value application. Special attention is given to its measurement within private equity funds. In fact, while on one hand, funds that invest in securities traded in an active market, with prices readily available, will find the fair value measurement process relatively straightforward. On the other hand, funds that invest in instruments that, although not traded in an active market, are valued using observable inputs and well-established valuation models will find this process more complex. Therefore, arriving at a fair value involves most judgements for funds, especially for alternative and less liquid funds such as private equity. The first part of the thesis introduces the concept of fair value accounting, the history, the shortcomings and the most relevant accounting standards that discipline its definition and application. The second part, after an introduction of the private equity, will focus on technical issues related both to the fair value measurement of the fund’s investments and to the valuation of the investors’ interests in the fund.