EVCA Handbook Professional Standards for the Private Equity and ...

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66 EVCA Handbook Professional Standards for the Private Equity and Venture Capital IndustryD EFINITIONSThe following definitions shall apply in these Guidelines.Fair ValueNet Asset Value (‘NAV’)Underlying BusinessActive MarketA financial instrument is regarded as quoted in an activemarket if quoted prices are readily and regularly availablefrom an exchange, dealer, broker, industry group, pricingservice or regulatory agency, and those prices representactual and regularly occurring market transactions onan arm's length basis.A market is considered active when transactions are takingplace regularly at an arms length basis with sufficientvolume and frequency to determine a price on an ongoingbasis. The necessary level of trading required to meet thesecriteria is a matter of judgement.Attributable Enterprise ValueThe Attributable Enterprise Value is the Enterprise Valueattributable to the financial instruments held by the Fundand other financial instruments in the entity that rankalongside or beneath the highest ranking instrumentof the Fund.Distressed or Forced TransactionThe Fair Value is the price at which an orderly transactionwould take place between Market Participants at theReporting Date (measurement date).Fund or Private Equity FundThe Fund or Private Equity Fund is the generic term usedin these Guidelines to refer to any designated pool ofinvestment capital targeted at all stages of private equityInvestment from start-up to large buyout, including thoseheld by corporate entities, limited partnerships andother investment vehicles.Fund-of-FundsFund-of-Funds is the generic term used in these Guidelinesto refer to any designated pool of investment capitaltargeted at investment in underlying Private Equity Funds.Investee CompanyThe term Investee Company refers to a single business orgroup of businesses in which a Fund is directly invested.InvestmentNAV of a Fund is the amount estimated as beingattributable to the investors in that Fund on the basisof the Fair Value of the underlying Investee Companiesand other assets and liabilities.Orderly TransactionAn orderly transaction is a transaction that assumesexposure to the market for a period prior to the ReportingDate to allow for marketing activities that are usual andcustomary for transactions involving such assets or liabilities.Quoted InstrumentA Quoted Instrument is any financial instrument for whichquoted prices reflecting normal market transactions arereadily and regularly available from an exchange, dealer,broker, industry group, pricing service or regulatory agency.RealisationRealisation is the sale, redemption or repayment ofan Investment, in whole or in part; or the insolvency ofan Investee Company, where no significant return tothe Fund is envisaged.The Underlying Business is the operating entities in whichthe Fund has invested, either directly or through a numberof dedicated holding companies.ValuerThe Valuer is the person with direct responsibility forvaluing one or more of the Investments of the Fundor Fund-of-Funds.A forced liquidation or distress sale (i.e., a forcedtransaction) is not an orderly transaction and is notdeterminative of Fair Value. An entity applies judgementin determining whether a particular transactionis distressed or forced.Enterprise ValueThe Enterprise Value is the value of the financialinstruments representing ownership interests inan entity plus the net financial debt of the entity.An Investment refers to all of the financial instrumentsin an Investee Company held by the Fund.LiquidityLiquidity is defined as the relative ease and promptnesswith which an instrument may be sold when desired.Market ParticipantsMarket Participants are potential or actual willing buyersor willing sellers when neither is under any compulsionto buy or sell, both parties having reasonable knowledgeof relevant facts and who have the ability to performsufficient due diligence in order to be able to make orderlyinvestment decisions related to the enterprise.Reporting DateIs the date for which the valuation is being prepared,which equates to the measurement date.Secondary TransactionA Secondary Transaction refers to a transaction whichtakes place when a holder of an interest in unquoted orilliquid Funds trades their interest to another party.Unquoted InstrumentAn Unquoted Instrument is any financial instrument otherthan a Quoted Instrument.8 I NTERNATIONAL P RIVATE E QUITY A ND V ENTURE C APITAL VALUATION G UIDELINESI NTERNATIONAL P RIVATE E QUITY A ND V ENTURE C APITAL VALUATION G UIDELINES 9
67 EVCA Handbook Professional Standards for the Private Equity and Venture Capital Industry1. T HE C ONCEPT OF FAIR VALUES ECTION I:D ETERMINING FAIR VALUEThe Fair Value is the price at which an orderly transaction would take place betweenMarket Participants at the Reporting Date.For Quoted Instruments, available market prices will be the primary basis forthe determination of Fair Value.For Unquoted Investments, the estimation of Fair Value requires the Valuer to assumethe Underlying Business is realised at the Reporting Date, appropriately allocated tothe various interests, regardless of whether the Underlying Business is prepared for saleor whether its shareholders intend to sell in the near future.The objective is to estimate the hypotheticalexchange price at which Market Participantswould agree to transact at the Reporting Date.Fair Value is not the amount that an entitywould receive or pay in a forced transaction,involuntary liquidation or distressed sale.However the hypothetical exchange price musttake into account current market conditionsfor buying and selling assets.Although transfers of shares in privatebusinesses are often subject to restrictions,rights of pre-emption and other barriers,it should still be possible to estimate whatamount a willing buyer would pay to takeownership of the Investment.2. P RINCIPLES OF VALUATIONThe Fair Value of each Investmentshould be assessed at each ReportingDate.In the absence of an active market for afinancial instrument, the Valuer must estimateFair Value utilising one or more of the valuationmethodologies.In estimating Fair Value for anInvestment, the Valuer should apply amethodology that is appropriate in lightof the nature, facts and circumstancesof the Investment and its materiality inthe context of the total Investmentportfolio and should use reasonabledata and market inputs, assumptionsand estimates.10 I NTERNATIONAL P RIVATE E QUITY A ND V ENTURE C APITAL VALUATION G UIDELINES I NTERNATIONAL P RIVATE E QUITY A ND V ENTURE C APITAL VALUATION G UIDELINES 11
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