AIFMD – Valuation

B R I T I S H V I R G I N I S L A N D S | C A Y M A N I S L A N D S | D U B A I | D U B L I N | H O N G K O N G | J E R S E Y | L O N D O N | S I N G A P O R E

© 2013 WALKERS www.walkersglobal.com

Global Legal Solutions

AIFMD – Valuation

IntroductionThe Alternative Investment Fund Managers Directive (“AIFMD”), requires alternative investment fund managers (“AIFMs”) to establish and maintain consistent written procedures for each of the alternative investment funds (“AIFs”) that they manage so that the proper and independent valuation of AIF assets can be performed.*

RequirementsThe valuation function may be carried out either by the AIFM itself or it may appoint an external valuer. Where the AIFM performs this function, it must ensure that the valuation process is functionally independent from the portfolio management of the AIF and the remuneration policy and that other measures are put in place to ensure that any conflicts of interest are mitigated.

External ValuerOne or more external valuers may be appointed to carry out the valuation function, provided they are independent from the AIF, the AIFM and any other person with close links to the AIF or AIFM. The external valuer must be professionally recognised and must be in a position to offer professional guarantees, which should be in written form and should confirm the external valuer’s qualification and capability to perform the function in accordance with AIFMD and local law requirements.

Delegation to any such external valuer must be in accordance with the delegation requirements of AIFMD. For more information on these, please see our factsheet entitled “AIFMD - Delegation Requirements”.The external valuer may not, in turn, delegate its function to a third party.

Despite any delegation to an external valuer, the AIFM remains ultimately responsible for the proper valuation of AIF assets, the calculation of the net asset value and the publication thereof. However, the external valuer will be held liable to the AIFM for losses caused by its negligence or intentional failure to perform its task.

AIFMD Factsheet

* The valuation requirements initially apply to all authorised AIFMs. They will not apply to non-EU AIFMs until 2015 at the earliest.

http://www.walkersglobal.com/images/AIFMD/AIFMD-Directive.pdf

http://www.walkersglobal.com/images/AIFMD/AIFMD-Delegation-Factsheet.pdf




Where an entity appointed to provide administration services to an AIF calculates the net asset value of the AIF based on values obtained from other sources, they will not be considered to be an external valuer unless they also provide valuations for individual assets of the AIF’s portfolio.

Frequency of ValuationAll AIF assets must be valued and the net asset value per unit of the AIF published at least once a year. If the AIF is open-ended, it must value as often as it deals and as is appropriate to the assets of the AIF, whereas closed-ended AIFs must value their assets when the capital of the AIF increases or decreases.

Valuation Policies AIFMs shall establish, maintain, implement and review, for each AIF they manage, written policies and proceedures for the valuation of their assets. These policies must set out the method used to value each class of asset in which the AIF may invest and must be applied consistently across all AIF assets.

The valuation policies must include the following details:

>> the competence and independence of personnel who are effectively carrying out the valuation of assets;

>> the specific investment strategies of the AIF and the assets the AIF might invest in;

>> the controls over the selection of valuation inputs, sources and methodologies;

>> the escalation channels for resolving differences in values for assets;

>> the valuation of any adjustments related to the size and liquidity of positions, or to changes in the market conditions, as appropriate;

>> the appropriate time for closing the books for valuation purposes; and

>> the appropriate frequency for valuing assets.

A review process for the value of assets in respect of which there is a material risk of an inappropriate valuation, including where the valuation is based on prices only available from a single counterparty or broker source.

The valuation methods adopted by an AIFM shall be applied to all assets within an AIF taking into account the investment strategy, the type of asset and, if applicable, the existence of different external valuers.

If a model is used to value the assets of an AIF, it must be subject to the prior approval of the AIFM. In addition, details must be included in the valuation policy document, including the reason for the choice of the model, the underlying data, the assumptions used in the model and the rationale for using them, the limitations of the model-based valuation. In addition, any valuation model must be validated by an appropriate person as suitable, who was not involved in the building of the model.

Where an external valuer is appointed, the valuation policies will include details of how information is shared between the AIFM and the external valuer. The valuation policies shall also include details of the initial and periodic due diligence conducted by the AIFM such external valuers.

If the AIFM performs the valuation function itself, details of how any conflict of interest is mitigated must be included in the policies. A review of the AIF’s asset valuation policies should also be performed to ascertain compliance with the new requirements.

These policies must be reviewed at least annually.




DisclaimerThe information contained in the factsheet is necessarily brief and general in nature and does not constitute a detailed summary of all of the relevant information or legal advice. Appropriate legal or other professional advice should be sought for any specific matter.

ConclusionWhile AIFMD does not prescribe the methodologies to be used for valuing assets and AIF’s will continue to have flexibility to select the appropriate methodology to value their assets. AIFM’s should carefully consider the new AIFMD requirements as they will be ultimately be liable for the proper valuation of all the assets of all the AIFs that they manage. As a first step each AIFM should consider whether they intend to perform the valuation function or delegate to an external valuer. As a review of each AIF’s current valuation policies should also be performed to ascertain compliance with the new requirements. the new requirements should not require any significant amendments to the current valuation processes, but rather a codification of the current practice.

Documents

AIFMD – Valuation