In its latest draft valuation guidelines, the International Private Equity and Venture Capital (IPEV) Guidelines Board has for the first time treated private debt as an asset class separate to private equity.
The 67-page draft guidelines, which were last updated in 2015, contain references to appropriate ways of valuing a range of debt instruments, such as distressed debt and bridge loans. Previously, debt had only been considered as part of private equity transactions rather than being given separate treatment.
Paul Cunningham, chair of the IPEV Board, also told sister publication Private Debt Investor the Board would be looking to add a new member with private debt experience. He said that the Board had previously been informed by accountants and consultants who were familiar with private debt, but acknowledged the Board has been “private equity heavy” up to now. He added, if the right person is identified, they could be appointed “tomorrow” and that conversations with candidates were currently taking place.
With its foundations rooted in private equity since the guidelines were first launched in 2005, the IPEV board has also, for the first time, used the term “private capital” rather than “private equity” in an attempt to make clear that they now encompass debt as well as equity.
“Previously, debt was only covered as it applied to private equity, i.e. how you measured the value of the debt alongside equity in private equity deals,” Cunningham told PDI. “Given where the guidelines came from and the history, that’s not surprising. In this update we have tried to cover debt as a separate, standalone investment. It’s probably not as big a part of the guidelines as the equity piece but a lot of the principles are common to both.”
Cunningham said the broad principles of fair value – what an investment could be sold for today given a willing buyer and seller – applied to private debt and private equity equally, “but the exact [valuation] methodologies may be different”.
“We’re not trying to teach grandma to suck eggs,” he added. “It’s a broad framework that discusses what the approach and methodology should be to give investors and auditors some comfort that everything is being done within a valuation framework. But it’s not meant to be prescriptive, we’re not telling people this is the exact method you have to use.”
Cunningham said Board discussions about private debt had been prompted by a range of factors, including coverage in PDI, such as this article. The Board concluded that “private credit funds are very similar to private debt funds and it seemed appropriate to address that”.
The IPEV Board has requested industry feedback on the latest draft guidelines by November 27. Final guidelines will then be published before Christmas and implemented from the beginning of next year.