The 2023 Edition of the Guide has:

• streamlined the recommendations from 17 to 11;
• the Guide looks at the key elements that need to be in place. The recommendations discuss in detail what the best practices should be for those elements:
   
• Governance
  • Recommendation 1 In advance of a fund’s launch, a summary of practical and workable pricing and valuation practices, procedures and controls should be set out in a Valuation Policy Document and approved by the fund governing body in consultation with the Manager and any other relevant stakeholders.
  • Recommendation 2 The fund governing body is ultimately responsible for the fair valuation hierarchy.
  • Recommendation 3 There should be adequate segregation of duties in the NAV determination process.
  • Recommendation 4 Oversight and final responsibility for the valuation process rests with the fund governing body.
     
• Transparency
  • Recommendation 5 The fund’s OM should disclose (i) the name of the party(ies) to whom any responsibility for the calculation, determination and production of NAV may have been delegated, (ii) the frequency of valuation, and (iii) a broad outline of the methodology to be used by the valuation service provider(s).
     
• Procedures, processes and systems
  • Recommendation 6 The procedures disclosed in the Valuation Policy Document should be designed to ensure that the parties controlling the fund’s valuation process are segregated from the parties involved in the fund’s investment process.
  • Recommendation 7 The policies, procedures and controls disclosed in the Valuation Policy Document should be consistently applied.
     
• Sources, models and methodology
  • Recommendation 8 Where possible, the valuation of each position in the fund’s portfolio, as derived from the primary source, should be checked against at least one secondary price source. A price matrix should outline the primary source and one or more secondary sources to be used for each security type and the hierarchy of sources where multiple sources exist.
  • Recommendation 9 The use of a pricing model for a particular product type should be approved by the fund governing body and documented in the price matrix or Valuation Policy Document.
  • Recommendation 10 The fund governing body should adopt and periodically review the fund’s policies regarding the side pocketing of illiquid and/or Level 3 investments, where applicable.
     
• Due diligence and setting contractual terms
  • Recommendation 11 Due diligence should assess whether any third-party providers that may be used have the skills to meet the current and future valuation needs of a fund.

The Guide also has:

• even greater depth of analysis of the US GAAP and IFRS accounting standards and valuations;
• extra considerations for private credit such as amortised cost;
• additional issues to take into consideration for digital assets;
• how to factor in ESG considerations; and
• a comprehensive Valuation Policy Document template.

Introduction

AIMA valuation recommendations

1.   Overview of valuation issues

      1.1   Fund governing bodies and valuation committees 

      1.2   Independence and expertise 

      1.3   Prudence and fairness

      1.4   Responsibility for valuation

      1.5   Consistency and adaptability

      1.6   Specific considerations 

      1.7   Accounting standards and valuation policies

2.   Governance 

      2.1   Adopt a Valuation Policy Document 

      2.2   Set a fair value hierarchy

      2.3   Segregate duties

      2.4   Oversee the valuation process 

3.   Transparency

      3.1   Identify and disclose the responsible parties 

      3.2   Make periodic NAV reports 

4.   Procedures, processes and systems 

      4.1  Segregate the valuation process from the investment process 

      4.2  Manage price sourcing and hierarchy levelling by the Manager 

      4.3   Apply pricing policy consistently 

      4.4   Establish price challenge process and controls

5.   Sources, models and methodologies 

      5.1   Use primary and secondary pricing sources 

      5.2   Approve and document use of any pricing model 

      5.3   Approve matrix pricing and compare model outputs 

      5.4   Adopt and periodically review side pocket policies, if applicable 

6.   Initial and on-going due diligence 

      6.1   Objectives of the due diligence process 

      6.2   Procedures performed in the initial valuation due diligence process 

      6.3   On-boarding and terms of engagement 

      6.4   On-going due diligence process and monitoring of risks identified

For further information please contact James Hopegood, Director, Asset Management Regulation & Sound Practices.

Recorded in June 2023

The fair and accurate valuation of instruments is a cornerstone of asset management. This is as much the case for alternative funds as it is for “traditional” ones investing in Level 1 assets. This newly updated edition of the Guide looks at sound practices for emerging asset classes such as private credit and digital assets as well as established alternative assets. It also has considerations for incorporating ESG into the valuation process.

Moderator:

• James Hopegood, Director, Asset Management, AIMA

Speakers:

• Clodagh O’Reilly, Director - Asset Management, PwC and chair of the working group
• Suzanne Morsfield, Global Head of Accounting Solutions, Lukka
• Graham Murphy, Chief Risk Officer, Polus Capital