"One of the great things about standards," so the saying goes. "is that there are so many of them."

AIMR, BVCA, EVCA, and PEIGG (the Private Equity Industry Guidelines Group), are at work on or have published separate reporting and valuation standards and guidelines. A complete list of links to the known publications is at the end of this article.

As early as 1992, the European Venture Capital Association started work on valuation guidelines. These were published and later revised and republished in March 2001. At that time EVCA also published reporting guidelines. These pioneering efforts raised awareness--some GPs report
in compliance with these guidelines.

Although many of these "standards" are similar, for example, many adopt "Fair Value" methodology. There are, as you would expect, differences. For example, the BVCA and EVCA stipulate that investments be valued semi-annually; the AIMR guidelines indicate that they be valued annually but reported on quarterly. What makes sense? We suppose it depends on your point of view. In the March 2001 EVCA conference in Geneva,
where the Reporting Guidelines had their debut, a GP panelist sounded not at all interested in changing reporting at all. Not surprising, but that was in another economic time. Is change coming? Is wider-spread adoption coming? Of what standard?

AIMR

In 1995, AIMR sponsored and funded the Global Investment Performance Standards (GIPS) committee to "develop and publish one global
standard by which firms calculate and present performance to clients and prospective clients." These were adopted by AIMR in February of 1999. What wasn't decided upon or adopted were standards for venture capital and private equity. They have arrived and AIMR wants your comments
on them. The deadline for your comments is March of 2003 with adoption set to begin to take effect in 2005.

The AIMR standards include Valuation Principles and Disclosure and Reporting Requirements.

Principles vs. Guidelines

The AIMR valuations standards recognize that valuing private equity assets isn't easy. Adoption of these additions to GIPS would require firms
to accept "Valuation Principles." This is similar to the approach created by the European Venture Capital Association (EVCA), which aren't rigid rules but instead are "Valuation Guidelines." As this publication states, "EVCA recognises that the valuation of unquoted investments is open to very different interpretations and, while these guidelines attempt to give a framework and guidance to the process, they do not attempt to
restrict it." As an example, we here present a synopsis of the AIMR document.

AIMR valuation principles:

1. Valuations must be prepared with integrity and professionalism by individuals with appropriate experience and ability under the
   direction of senior management.
2. It is recommended that valuations be reviewed by a qualified person or entity that is independent from the valuer. Such parties would include the independent auditors, an independent advisory board, or a committee independent of the executives responsible for the valuations.
3. The methods used to value venture capital and private equity investments must be clearly disclosed, including key assumptions.
4. The basis of valuation must be logically cohesive and applied rigorously. Although a Fair Value methodology is recommended, all valuations must, at a minimum, recognize when assets have a diminution in value.
5. Valuations must be prepared on a consistent basis from one reporting period to the next. If any change is deemed appropriate in either valuation principle or methodology, the change must be explained. When such a change gives rise to a material fluctuation in the valuation of the investments, then the effect of the change should also be disclosed.
6. Valuations must be prepared a least annually.

The document goes on to describe the Fair Value methodology in some detail.

Calculation Methodology

In an easy change for private i users, the "Since Inception IRR" (SI-IRR ) requires daily flows. Net-of-fees returns means net of management
fees & carry. Investment advisors returns must be calculated net of partnership and/or fund fees & carry.

Composite Construction Requirements

When creating composites, both Strategy and Vintage year composites are required. No commingling of asset types in composites is allowed:
LP Investments, Direct Investments and Open End (evergreen) Funds must report as separate composites.

Disclosure Requirements

You must disclose: the vintage of a composite; the liquidation date of each investment; unrealized appreciation/depreciation of each
composite; the total committed capital; if you use other valuation guidelines applied (BVCA, EVCA); valuation review procedures; the
definition of composite investment strategy; and the methodology used for benchmark (e.g. monthly flows).

Presentation & Reporting Standards

There's a bevy of reporting requirements. Here we go:

1. You must report IRRs that are net of fees and gross of fees for each year since inception.
2. For each year you also need to show paid-in capital, total invested capital and cumulative distributions.
3. In addition, there are six performance multiples:
   
   
   1. Ending market value plus distributed capital to paid-in (Investment Multiple)
   2. Ending value less unrealized appreciation to paid-in capital (Realization Multiple)
   3. Paid-in capital to committed (PIC);
   4. Distributed capital to paid-in capital (DPI)
   5. Residual value to paid-in capital (RVPI)
   6. Total value to paid-in capital (TVPI)


4. You must show a Benchmark for the same strategy and vintage presented for the same period's composite. If you don't use a
   benchmark, you must explain why. You are also asked to report the average holding period of each portfolio company over the life of
   the composite.

Links

CFA Institute Proposed Guidelines

EVCA Reporting Guidelines

EVCA Valuation Guidelines

BVCA Guidelines