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Valuation
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AIFMD requires that an authorised AIFM, for each AIF that it is authorised to manage, has “appropriate and consistent procedures so that a proper and independent valuation of the assets can be performed”. AIFMD sets out who can value the assets, how and when they should be valued and the AIFM’s liability towards the investors for valuations. AIFMD establishes that the rules applicable to the valuation function and the calculation and disclosure to investors of the net asset value per share/unit of the AIF shall be set out in the law of the Member State in which the AIF has its registered office and in the AIF’s instrument of incorporation.
The valuation function can be performed either by:
For the purposes of AIFMD, the person making the final determination on the value of the asset, or of a portfolio of assets, will generally be considered to be performing the valuation function. The final determination of the value of an asset will therefore be made either by the AIFM itself (with or without the support of third parties, which may provide valuations for certain assets (e.g. real estate appraisers)), or by one or more external valuers, if they provide final valuations for individual assets.
If the final determination of value is made by an external valuer, the authorised AIFM must be able to demonstrate that the external valuer is subject to mandatory professional registration and can furnish sufficient professional guarantees that it can value the assets independently in accordance with AIFMD and the law of the country where the AIF has its registered office. Professional guarantees must contain evidence of the external valuer’s qualification and capability to perform proper and independent valuations. See Article 73 of the Level 2 Regulations for further details on the content of professional guarantees.
Once the authorised AIFM appoints an external valuer, the AIFM must notify the appointment to the competent authorities of its home Member State, which may require the appointment of another external valuer instead, if the external valuer cannot meet the conditions referred to in the paragraph above. Furthermore, the external valuer may not delegate the valuation function to a third party.
The depositary appointed for the AIF cannot be appointed as an external valuer of the AIF, unless it has functionally and hierarchically separated the performance of its depositary functions from its tasks as an external valuer, and potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors of the AIF.
Where the valuation function is not carried out by an external valuer, the competent authority may require the authorised AIFM to have its valuation procedures and/or valuations verified by an external valuer or, where appropriate, an auditor.
The principles regarding valuation procedures set out above have been refined by guidance published by the competent authorities in each Member State, including in Luxembourg, as further described below.
An authorised AIFM must establish and review written policies and procedures for each AIF it manages. The Level 2 Regulations provide detail regarding the content of such policies and procedures, in particular the selection and use of valuation methodologies and the use of models to value assets. For further details on the content of such policies and procedures as set out in Article 67 of the Level 2 Regulations.
The authorised AIFM must also ensure that there is a consistent application of valuation policies and procedures across all of the AIFs it manages, taking into account the investment strategies and types of assets held by the AIFs, and, if applicable, whether the AIFs use different external valuers.
Valuation policies and procedures must be reviewed periodically, and at least once a year or before an AIF engages with a new investment strategy or type of asset. A review of the individual values of assets must be carried out where there is a material risk of an inappropriate valuation (click here for relevant examples in Article 71 of the Level 2 Regulations). In addition, there must be sufficient and appropriate checks and controls on the reasonableness of individual values. Such checks and controls must include the list in Article 71(3) of the Level 2 Regulations.
The valuation must be performed impartially and with all due skill, care and diligence. The authorised AIFM must ensure that the net asset value per share or unit of the AIF is calculated and disclosed to the investors in accordance with AIFMD, applicable national laws and the AIF rules. In addition, the procedures and methodology for calculating the net asset value per unit or share must be fully documented, there must be remedial procedures in place in the event of an incorrect calculation and the number of units or shares in issue must be subject to regular verification, at least as often as the unit or share price is calculated.
AIFMD sets out the timing of when valuations must be carried out. Assets must be valued and the net asset value per share or unit calculated on the occasion of each issue or subscription or redemption or cancellation of units or shares, but at least once a year.
If the AIF is open-ended, such valuations and calculations shall be carried out at a frequency which is both appropriate to the assets held by the AIF and the frequency with which it issues and redeems shares/units.
If the AIF is closed-ended, such valuations and calculations shall be carried out in the event of an increase or decrease of the capital of the relevant AIF.
AIFMD makes it clear that the authorised AIFM is responsible for the proper valuation of the assets and net asset values and the authorised AIFM’s liability towards the AIF and its investors is not affected by the fact that the authorised AIFM has appointed an external valuer. An external valuer, however, will be liable to the authorised AIFM for any losses suffered by the authorised AIFM as a result of the external valuer’s negligence or intentional failure to perform its tasks.
Luxembourg rules on valuation are set out in Article 17 of the Luxembourg AIFM Law.
The Frequently Asked Questions of the CSSF concerning the Luxembourg AIFM Law include more detail on the formalisation of the appointment of the external valuer and also sets out the conditions to appoint the administrator as external valuer.
The CSSF Circular 18/698 on the Authorisation and organisation of investment fund managers incorporated under Luxembourg law sets forth, in its Chapter 6.6, more granular rules applicable to Luxembourg authorised AIFMs in respect of: (i) their general obligations in respect of the valuation function (procedures and processes, methodologies, etc.); (ii) specificities related to the internal performance of the valuation function; and (iii) specificities related to the delegation of the valuation function.
In the UK, the valuation requirements are set out in FUND (Chapter 3.9) of the FCA Handbook.