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EUROPE – The European Private Equity and Venture Capital Association (EVCA) has published a new edition of its valuation guidelines - replacing the original manual produced in 1993.

The main reason for the new guidelines, the association says, is that distinctions between categories used in the original guidelines, particularly “venture” and “development” investments, have become blurred.
This is due to the growth of the asset class in the last decade and the internationalisation of the industry, together with the increase of information and the shortening of investment cycles, the new guidelines say.

The guidelines are a result of an informal survey of managers and investors in the private equity arena.
According to the survey, investors in private equity would like to see two separate valuations, one based on cost or the last round of financing, which would be applied in their capital account, and another based on a fair market value, which would be used to assess the prospective value of their portfolio.

Another significant change from the 1993 guidelines is an emphasis on disclosure and transparency of information, to provide as much confidence as possible in the valuations.

“It should be emphasised that the guidelines do not impose an obligation on managers of funds, but seek to set a benchmark against which members may wish to relate their reporting,” the handbook says.
It also suggests that European private equity managers follow the guidelines to create a consistent standard for the whole industry.

Valuation of investments, the EVCA’s principles say, should be prudent, consistent and professional, and the method used should be clearly disclosed.
Furthermore, an independent body should review valuations, which should be calculated to account for any dilution resulting from the exercise of ratchets, options or other incentive schemes.

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