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IPEV IRGs, EVCA Reporting Guidelines and ILPA Investor Reporting Guidelines compared: which ones should we choose?
The International Private Equity and Venture Capital Valuation Guidelines Board released for comments on April 4, 2012 its Draft Investor Reporting Guidelines for Private Equity and Venture Capital Funds, which were requested by the European Private Equity and Venture Capital Association as an update/revision to the EVCA Reporting Guidelines. The Board closed the official comment period on June 8, 2012 and plans to issue the official guidelines in late 2012 following any amendments that reflect constituents’ comments. The overriding question for general partners now is precisely which set of guidelines they should be preparing to adopt and whether the EVCA Reporting Guidelines will be replaced by IPEV IRGs once in force.
If you use the Internal Rate of Return (IRR) to measure the performance of your private equity fund you may be surprised to learn why it is inherently flawed, how it can create skewed interpretations not to mention the problems it causes with benchmarking. With many limited partners drilling down on very precise details of fund performance to make their allocation decisions, private equity will have to adopt a broader palette of performance metrics, which should prove to be more robust than the questionable IRR.
It would appear that the International Accounting Standards Board is finally engaged in understanding the investment management industry, alternative investment asset classes and private equity in particular. Despite the Board’s earlier refusal to provide a carve-out to private equity with regards to the consolidation exemption for investment companies/entities, similar to what a private equity fund reporting under US GAAP enjoys, there has been real progress this quarter. The Board is even trying to find solutions to more specific problems such as treatment of master-feeder structures, blocker funds and funds of funds. Credit for encouraging progress goes to the Financial Accounting Standards Board through its IFRS/US GAAP convergence process and its better understanding of the private equity asset class.
On 18 October 2011, after the comments period for the original draft that ILPA had released in August has ended and after they have incorporated comments from constituents (LPs, GPs, industry professionals and other constituents), ILPA released its Quarterly Reporting Standards Best Practices, the next of the series of standardised templates, with the first ones being the Drawdowns and Distributions templates release in January.
Consolidation has always been a big issue for private equity funds reporting under IFRS with many GPs shying away from IFRS (where possible) just to avoid consolidation or reporting under IFRS with a departure from the consolidation requirements. US GPs have been more fortunate with their specific rules for investment companies which basically exempt them from consolidating their portfolio companies and instead allowing investment companies (including PE funds) to measure their investments at fair value with the changes in fair value recognised in P&L. Unlike US GAAP though, under the existing IFRS rules, there is still no such exemption from consolidation for investment entities, but hopefully, with the new development discussed below, that will finally change soon.
In August 2011, the International Accounting Standards Board (IASB) has issued for public comment Exposure Draft ED/2011/3 Mandatory Effective Date of IFRS 9, whereby it is proposing to defer the mandatory effective date of the standard until 1 January 2015 (understand for annual periods beginning on or after 1 January 2015) from the original mandatory effective date 1 January 2013. Earlier application would still be permitted. Further relief from the requirement to restate comparative figures for entities voluntarily adopting the Standard before 2012 has not been provided, but feedback is sought. Comment period ends on 21 October 2011.