Alternative Asset Portfolio Valuation

Designing Investment Portfolio with Enterslice Alternative Asset Portfolio Valuation

Enterslice Advisory helps investors value their portfolios of unlisted assets and investments that don't have active market prices. In recent years, many alternative asset sectors, which include hedge funds, private equity firms, and venture capital firms, have experienced an unparalleled expansion. By providing risk funding to early-stage and growing companies, they are meeting a vital demand and promoting innovation and general economic growth.

Along with this expansion, openness and independence are receiving more attention. Regulators, as well as the limited partners that engage in these alternative asset vehicles, usually demand this. The requirement for the regular, independent valuation of the alternative asset portfolio held by the alternative asset vehicle is one of the main areas of focus. Professionals at Enterslice have extensive experience in this field, and they have offered portfolio valuation services to several well-known Indian alternative asset companies.

What are Alternative Investments or Alternative Assets?

Any investment in an asset class other than the standard ones stocks, bonds, and cash, for example, is referred to as an alternative investment or alternative asset (adults). Consequently, alternative investments contribute diversity to an alternative asset portfolio by providing risk/return profiles that are distinct from those of standard assets.

What is an Investment Portfolio?

An investment portfolio is a collection of assets belonging to a person, business, or organization. More practically, it can be described as a collection of securities a specific individual holds. Several variables, including the investor's risk tolerance, present financial status, future objectives, available resources, investing style, and transaction timing, contribute to the diversity of possible financial investments. The process of figuring out how much a corporation, an individual, or any other legal entity's assets are worth is called alternative asset portfolio valuation. Accurately measuring the fair values of these assets under management is crucial to making these computations easier. Since the assets that asset managers oversee are frequently the basis for their compensation, precisely valuing these underlying assets is essential to making these calculations easier.

The investor's capacity to recognize successful and lucrative investment opportunities is greatly impacted by each of these factors, which also have a significant impact on the selection of the contemplated assets. A portfolio is generally more effective at reducing the risk associated with any one investment the more diversified it is. Effective diversification can only be attained, though, by carefully examining and appraising each security on its own.

What distinguishes alternative investments from conventional ones?

The primary distinction between traditional and alternative assets lies in the fact that, in contrast to traditional assets, alternatives aren't traded on open markets.

On the other hand, alternative investments, also referred to as "private investments," are typically made through more limited channels like private debt and private equity. This provides an additional important attribute for alternative investments: a different liquidity profile compared to traditional investments.

Lastly, alternative assets are typically less regulated than traditional assets, even though they are more sophisticated than stocks and bonds. This, along with their illiquidity, which frequently necessitates a comparatively high minimum investment, is the reason why institutional investors, such as family offices or pension funds, are the only ones that typically hold them.

Valuing Alternative Assets

The growth of alternative asset portfolio classes, which include real estate, infrastructure, private debt, equity, and venture capital funds, has been substantial in recent years and is predicted to continue as institutional and individual investors look for ways to diversify their portfolio holdings with different return and risk profiles.

In the context of unprecedented market conditions and a challenging global economy, fair valuation of alternative asset portfolios, including the strength and reliability of the valuation process, is an area of increasing focus for investors, fund managers, accounting standards-setting bodies, auditors, and regulators.

This alternative asset portfolio valuation programme was created to assist participants in comprehending the difficulties involved in fairly valuing alternative asset portfolios and investments.

How did the Fair Value of alternative investments grow?

Several industry and investor reactions eventually set the stage for the significant rise of the alternative investment fund sector. Among the contributing elements are

Following the collapse of the public markets, investors looked for alternative places to store their money. Alternatives quickly gained appeal due to their poor correlation with mainstream markets.

Following the recession, several publicly traded companies chose to go private to rebuild and restructure, which increased the amount of opportunities for private market investment.

Liquidity became less appealing due to volatility. The daily whipsawing of the public markets made alternatives which frequently have extended lock-up periods and are valued at monthly or quarterly intervals much more alluring to investors.

Consequently, alternatives have gained ground in the portfolios of pension funds, family offices, and all intermediaries.

Valuation of Alternative Asset Portfolio

The primary goal in valuing an investor's alternative asset portfolio is to ascertain the worth of each asset the investor has, which yields the overall asset value of all the holdings. Each security's mathematical analysis is taken into consideration when determining the overall value of an alternative asset portfolio. The ability to manage resources, make informed investment decisions, and make necessary portfolio adjustments is why portfolio valuation is crucial.

How does Portfolio Valuation Work?

The value of each asset class in the alternative asset portfolio, as well as the overall portfolio value, are determined throughout the portfolio valuation procedure. Through an analysis of market trends, overall performance, and other aspects, the worth of each asset is confirmed. In this sense, it is easy to value financial securities like stocks and bonds because their prices are easily verifiable and readily available.

When do you need Portfolio Valuation?

All investors need to value their portfolios effectively, but those with short-term goals especially need to do so. This is because it makes it possible to evaluate the overall returns and risks and to manage one's resources appropriately. You can make smarter investments, modify your holdings in response to market conditions, and seize opportunities when your portfolio is accurately valued.

It is also crucial for accounting, particularly for the filing of tax returns and the reporting of earnings and losses. Therefore, it is advised that all investors, professional financial analysts, experienced traders, or amateur investors, regularly value their portfolios.

Regulation of Portfolio Valuation

As of right now, the Assets and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (the "AIF Regulations"), Regulation 23, have been followed in the valuation of assets in terms of an Alternative Investment Fund. AIF managers only needed to offer a description of the asset valuation process and methodology, and Regulation 23 gave AIFs latitude in adopting valuation approaches or methodologies for the valuation of alternative asset portfolios. Furthermore, neither when the PPMs were submitted to SEBI nor when they were later reported to SEBI were the procedures for the alternative asset portfolio appraisal revealed.

A consultation paper titled "Standardized approach to valuation of the alternative asset portfolio of Alternative Investment Funds" (also known as the "Consultation Paper on Valuation by AIFs") was released by SEBI on January 06, 2023. The paper included a number of topics, including the necessity for a standardized approach to valuation methodology. Additionally, SEBI polled 150 managers of various AIF categories to learn more about the current valuation procedures being used, among other things. Consequently, SEBI has established a standardized method for the valuation of alternative asset portfolios through an amendment dated June 21, 2023. The Consultation Paper on Valuation by AIFs, this standardized methodology not only specifies how AIF investments should be valued, but it also outlines the manager of an AIF's obligations about this valuation.

A standardized approach about valuation principles/methodology/standard for valuing alternative asset portfolio is one of the steps to ensure fair disclosure of the value of alternative asset portfolio to the investors, the Consultation Paper on Valuation by AIFs stated, emphasizing the need for a standardized approach to valuation. Additionally, it will guarantee that the AIF industry's valuation standards, principles, and procedures are the same and that the performance of each AIF and the industry as a whole is benchmarked using valuations completed by consistent standards and methodologies to fairly represent their respective performances.

Standardized method for valuing an AIF investment portfolio

Previously, as per regulation 23(1), AIFs had to value their investments by a schedule that SEBI would periodically specify. As a result, SEBI has established a method of valuation that states that securities whose valuation standards have previously been established under the SEBI (Mutual Funds) Regulations, 1996, must be evaluated by those standards.

Valuation norms as per Mutual Fund Regulations

The Mutual Funds Regulations, 1996, have established valuation norms in their eighth schedule. These norms stipulate certain concepts that must be adhered to when conducting investment appraisal. These principles, among other things, specify that investments must be valued at fair market value, name the approaches that will be applied to the valuation of each kind of held securities or asset, review the valuation policies regularly, and emphasize the necessity of putting policies in place to prevent incorrect valuation.

How are different securities valued?

The standards for valuation established by these MF laws allow for the appraisal of various kinds of securities based on their characteristics.

Traded and Nontraded Securities - Non traded securities must be valued in good faith by the Asset Management Company (AMC) using appropriate valuation techniques based on the AMC Board of Directors' approved principles. Traded securities aside from money market and debt securities must be valued at the last quoted closing price on the stock exchange. Additionally, the AMC must value such securities in good faith and according to a set of rules. According to these principles, the value of the equity instruments must be determined by capitalizing earnings alone or in conjunction with the net asset value. The price or earnings ratios of comparable traded securities must be used for capitalization purposes, along with a suitable discount for lower liquidity.

Convertible securities - The non-convertible bonds and debentures should be evaluated using the same methodology as a debt instrument, and the convertible portion should be valued using the same methodology as equity instruments.

Rights Shares - Rights shares should be valued as follows until they are traded: the difference between the Ex rights price and the rights offer price multiplied by the number of rights offered divided by the number of original shares owned. The renunciation value will be considered, though, if the decision is made to renounce rather than subscribe for the right shares and these renunciations are sold.

The situation of other securities – how will they be valued?

Securities not specifically listed in the mutual fund requirements must be valued using the AIF Industry Association-approved methodology. However, at least 33% of the AIFs registered with SEBI shall be members of this industry association. Additionally, after taking into account the suggestions made by SEBI's Alternative Investment Policy Advisory Committee (AIPAC), it is necessary to support suitable valuation rules. The number of private debt funds on the market has increased significantly in recent times. These funds make investments in unusual ideas, such as hybrid securities that combine elements of debt and equity. It will be interesting to observe how these devices are valued uniformly.

Duties of the AIF Manager

The managers were responsible for ensuring that the independent valuer computes and completes the valuation of the investments of the AIF scheme in the way that the Board specifies, as well as for the true and fair valuation of the investments of the AIF scheme, in accordance with sub-regulations (5) and (6) of regulation 23 of the AIF Regulations.

Changes and deviations that must be disclosed

Following the modification, the management is now required to notify the investors of the reasons for any divergence of more than 20% between two consecutive values or more than 33% within a financial year about each asset class. Changes in accounting principles, assumptions, valuation methodology, and approach are a few examples of what this could include.

Independent Valuer

The eligibility requirements for appointment as an independent valuer have been outlined by SEBI, and they stipulate that the applicant cannot be an associate, manager, sponsor, trustee, or affiliate of the AIF. In addition, he must have three years of experience and be a member of a professional organization like the CFA Institute, ICAI, ICSI, or ICMAI. If such a valuer is a business, it must be a division or holding of a credit rating agency that is SEBI registered.

Reporting Investment Valuations to Performance Benchmarking Agencies

The fund manager must make sure that one of the conditions of the subscription agreement with the investee firm is a set period for producing audited accounts. This will allow AIFs to submit value reports to performance benchmarking organizations in less than six months based on the audited data of investee companies. Only once the fund's books of accounts have been audited in compliance with AIF standards will such reporting be completed.

Improve Transparency, Independence and Accountability with Enterslice Service

As seasoned specialists, we have the know-how to pinpoint and assess the crucial operational and financial motivators required to guarantee a strong valuation collaboration with managers and investors. To evaluate value at the fund, portfolio, and investment level, we tackle intricate valuation problems from crucial investing, regulatory, and strategic viewpoints.

Our operational legacy and extensive valuation experience work together to provide private equity, hedge fund managers, banks, NBFCs, business development firms, and other financial services companies with efficient and effective solutions for valuation problems. Enterslice is well positioned to help customers navigate the constant crosscurrents in the business by fusing significant experience in the audit, technological, legal and compliance, regulatory, and limited partner communities with unique industry knowledge across the firm.

Our services for portfolio valuation include the impartial appraisal of illiquid investments in all asset classes. We are here to help you with the creation of internal valuation rules as well as other risk and compliance policies required to guarantee best-in-class standards. We recognize your need to institutionalize changing industry best practices.

Get a Complete and Accurate Portfolio Valuation from Enterslice

Getting in touch with a knowledgeable and experienced partner like Enterslice is the greatest approach to getting a clear image of the value of an alternative asset portfolio. As part of a larger plan to assist our clients in achieving their short- or long-term financial goals, we at Enterslice regularly provide our clients with portfolio valuation research and review. Constant guidance on present and future strategies, distribution, and withdrawal rates is necessary for an alternative asset portfolio. Numerous additional factors also play a role in deciding the overall return on investment. This complex work is best performed by an experienced, knowledgeable team.

Get in touch with the Enterslice team right now if you have questions regarding the value of your entire alternative asset portfolio or if you just want to find new prospects for your long-term financial planning. Recognize your unique objectives and aspirations and carry out a detailed portfolio valuation. Together, we can make sure you’re headed towards a prosperous and stable future.