The Directive 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”. The Directive sets out who can value the assets, how and when they should be valued and the AIFM’s liability towards the investors for valuations.
The Directive 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.
Who the valuation function can be performed by
The valuation function can be performed either by:
- an external valuer which is independent from the AIF/AIFM (or any other persons with close links to the AIF/AIFM); or
- the authorised AIFM itself, provided that the valuation task is functionally independent from the portfolio management and the remuneration policy, and other measures ensure that conflicts of interest are mitigated and that undue influence upon the employees is prevented.
The FCA has indicated that in the UK, the person making the final determination on the value of the asset, or of a portfolio of assets, is considered to be performing that valuation function.
For 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 the Directive 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. Click here 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 that another external valuer be appointed 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 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 home regulator may require the authorised AIFM to have its valuation procedures and/or valuations verified by an external valuer or, where appropriate, auditors. In the UK, the FCA is proposing to publish guidance to clarify what safeguards should be in place to confirm the functional independence of the valuation function where no external valuer has been appointed.
Valuation Policies and Procedures
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 the Level 2 Regulations, click here.
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 addition, there must be sufficient and appropriate checks and controls on the reasonableness of individual values. Such checks and controls must include the following list – click here.
Valuation methodology and frequency of valuation
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 the Directive, 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.
The Directive 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.
AIFM’s liability towards the AIF and its investors
The Directive 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.
In the UK, the valuation requirements are set out in FUND (Chapter 3.9) of the FCA Handbook. Please note that in a recent consultation paper, the FCA proposed inclusion of an additional Q&A section to FUND 3 to provide further guidance on the valuation regime. The consultation containing the draft Q&A section can be accessed here.