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4 Pager Executive Summary Valuation Guide 26 March (2)

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  Sponsored by: GUIDE TO SOUND PRACTICES FOR THE VALUATION OF INVESTMENTS2018 Edition  AIMA is pleased to present this updated version of the Guide to Sound Practices for the Valuation of Investments. The alternative asset fund industry has continued to develop and mature since the last version of the guide was published in October 2013. Although the signicant challenges that arose immediately following the nancial crisis have been moderated by new regulatory requirements and the passage of time, valuation remains a continuing area of regulatory, accounting and investor scrutiny. In addition, a signicant increase in the numbers and types of alternative asset funds investing in and holding illiquid assets has heightened interest in valuations processes.AIMA believes that the enhancement of sound practices in the area of valuation is an ongoing process, given the evolution of the dierent types of instruments, and developments in valuation techniques in the context of a changing regulatory environment. The vast majority of alternative fund managers behave in a responsible manner and take their duciary duties very seriously. Their reputation and future success relies upon their reliability, transparency and credibility in the eyes of existing and potential investors. Such investment managers have an obvious vested interest in the ongoing stability of nancial markets and the equitable treatment of investors. AIMA’s previous valuation guides have demonstrated that opinions and techniques may vary but that most stakeholders understand the issues that arise and seek to address them as diligently as those who operate in other nancial sectors. The valuation of nancial assets is an area where inherent risks can never be eliminated, regardless of how simple the asset class or investment vehicle may appear. This fourth edition of the guide seeks to reflect the changes in the markets and industry with respect to valuation since 2013. We have expanded the number of recommendations by one, to 17, and enhanced and updated a number of the existing recommendations to reflect trends in valuation processes during that period. This version of the guide also better reflects the valuation practices that have developed in the wake of the implementation of the AIFMD.These recommendations on hedge fund valuation, which AIMA has developed over time, have been recognised and acknowledged globally by regulators. The recommendations reflect sound practice in alternative asset fund valuation in the current environment. The guide sets out and elaborates on: Recommendations regarding governance 1. adopting a Valuation Policy Document;2. the contents of a Valuation Policy Document;3. establishing a fair value hierarchy;4. segregating duties;5. overseeing the valuation process; Recommendations regarding transparency 6. making appropriate disclosures to investors;7. disclosing any material involvement of the investment manager in the valuation process;8. providing transparency reporting to investors; Recommendations regarding procedures, processes and systems 9. segregating the valuation process from the investment process;10. managing investment manager involvement in the valuation process;11. maintaining consistency with accounting standards;12. applying and deviating from the policies in the Valuation Policy Document;13. managing price challenges and inaccurate vendor sourced prices; Recommendations regarding sources, models and methodologies 14. establishing primary pricing sources;15. using broker quotations;16. using pricing models and pricing matrices; and17. valuing side-pockets. Executive summary 2 Guide to Sound Practices for the Valuation of Investments (2018 Edition)  1. Introduction 1.1 Valuation1.2 Alternative funds 2. AIMA’S revised recommendations for valuation3. Overview of valuation issues 3.1 Responsibility for valuation3.2 Responsibility for valuation under AIFMD3.3 Fund governing bodies and valuation committees3.4 Independence and expertise3.5 Prudence and fairness 3.6 Consistency and flexibility 3.7 Accounting standards and valuation policies 4. Recommendations on governance 4.1 Adoption of a Valuation Policy Document4.2 What should be in the Valuation Policy Document4.3 Setting a fair value hierarchy4.4 Segregation of duties4.5 Oversight of the valuation process by the fund governing body 5. Recommendations on transparency 5.1 Disclosure in the oering document 5.2 Investment manager involvement in pricing and valuation process5.3 Administrator transparency reports5.4 NAV reporting 6. Recommendations on procedures, processes and systems 6.1 Valuation process segregated from investment process6.2 Price sourcing and fair valuation levelling by the investment manager6.3 Practical and consistent with the fund’s accounting standards6.4 Consistent application of procedures and approval of deviations6.5 Price challenge controls6.6 Large price movements6.7 Backtesting and stress testing 7. Recommendations on sources, models and methodologies 7.1 Principles for pricing sources7.2 Exchange-traded instruments7.3 Other quoted securities7.4 OTC derivatives 7.5 Fair valuation considerations for dicult-to- price securities7.6 Side-pockets7.7 Contingency planning 8. Valuation due diligence on valuation service providers and independent valuation experts 8.1 Objectives of the due diligence process8.2 Procedures performed in the valuation due diligence process8.3 On-boarding and terms of engagement8.4 On-going due diligence process and monitoring of risks identied APPENDIX A - Valuation StakeholdersAPPENDIX B - Valuation Policy Document OnlineAPPENDIX C - Summary of Recent Developments in Regulations and Industry Guidelines Impacting Valuations in the Alternative Investment SectorAPPENDIX D - Analysis of ASC 820 and IFRS 13APPENDIX E - Digital Asset ConsiderationsOlwyn Alexander (Co-Chair)PricewaterhouseCoopers Ryan McNelley (Co-Chair) Du & Phelps Barry ChristoforouDeloitteBevan Kaminer Brevan Howard Asset Management Christopher Gardner Dechert LLPDan SerranoElliott Management Corporation Daniel Johnson SS&C GlobeOp Eric ChampBNY MellonGary IbbottCheyne Capital Management  Joachim HeukmesDeloitte Matthew Tidman Polygon Global Partners LLPMelissa Brady RSM LLPRichard DeBohunPolygon Global Partners LLPRobin GvysihicDeloitteRyan Teal Albourne Partners Shaun BrickCQS LLPStuart Murphy Parquet Capital Management LLCToby Rutterford Prudential Portfolio Management GroupAIMA and the Working Group would also like to thank the following people who also contributed toward the drafting and production of this Guide:David Larsen Du & Phelps  Jeremy Philips PricewaterhouseCoopersClodagh O’ReillyPricewaterhouseCoopersPaul C KellyPricewaterhouseCoopersShaan ElbaumPricewaterhouseCoopersDean AhmadPricewaterhouseCoopersArlene TowarnickeRSM LLPTom CarrRSM LLPElectronic copies of the full Guide to Sound Practices for the Valuation of Investments (2018 Edition) are available to AIMA member contacts via the AIMA website. The electronic copies are subject to a limited licence and are reserved for the use of AIMA members only.For further details on AIMA membership, please contact Fiona Treble (ftreble@aima.org), who will be able to assist you. Table of ContentsWorking Group Members 3 Guide to Sound Practices for the Valuation of Investments (2018 Edition)  Disclaimer The Guide is not a substitute for specic advice, whether legal, regulatory, tax or other advice, nor for professional  judgement. It does not seek to provide detailed advice or recommendations on the wider ranging corporate governance issues.© The Alternative Investment Management Association Ltd, 2018 AIMA members have exclusive access to a growing library of industry references: Due Diligence Questionnaires:Guides to Sound Practice: ã Administratorsã Business Continuity Managementã Clearing Membersã Cyber Security ^ã Fund Directorsã Investor Relationsã Investment Managers ã Liquidity Risk Management *ã Prime Brokersã Market Abuse and Insider Trading *ã Vendor Cyber Security ^ã Operational Risk Managementã OTC Derivatives Clearing Guides and Guidance Notes: ã Outsourcing *ã Fund Directors’ Guideã Paying for Research ^ã Guide to Liquid Alternative Fundsã Private Credit *ã Guide to Managed Accountsã Selecting a Prime Brokerã Side Letter Guidanceã Selection and Periodic Assessment of Administratorsã Media Relationsã Valuation of Investmentsã Expense Allocation Guidance * * Forthcoming ^ Update in progress About AIMA AIMA, the Alternative Investment Management Association, is the global representative of the alternative investment industry, with more than 1,900 corporate members in over 60 countries. AIMA’s fund manager members collectively manage more than $2 trillion in assets. AIMA draws upon the expertise and diversity of its membership to provide leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programmes and sound practice guides. AIMA works to raise media and public awareness of the value of the industry. AIMA set up the Alternative Credit Council (ACC) to help rms focused in the private credit and direct lending space. AIMA is committed to developing skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the rst and only specialised educational standard for alternative investment specialists. AIMA is governed by its Council (Board of Directors). For further information, please visit AIMA’s website, www.aima.org. About the ACC The Alternative Credit Council (ACC) is a global body that represents asset management rms in the private credit and direct lending space. It currently represents over 100 members that manage $350bn of private credit assets. The ACC is an aliate of the Alternative Investment Management Association (AIMA) and is governed by its own board which ultimately reports to the AIMA Council. ACC members provide an important source of funding to the economy. They provide nance to mid-market corporates, SMEs, commercial and residential real estate developments, infrastructure projects and trade and receivables businesses. The ACC’s core objectives are to provide guidance on policy and regulatory matters, support wider advocacy and educational eorts and generate industry research with a view to strengthening the sector’s sustainability and wider economic and nancial benets. Alternative credit, private debt or direct lending funds have grown substantially in recent years and are becoming a key segment of the asset management industry. To nd out more, visit www.lendingforgrowth.org. 4 Guide to Sound Practices for the Valuation of Investments (2018 Edition)
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