Proskauer partner Josh Newville discussed the SEC’s focus on valuation of private fund investments at the recent Securities Enforcement Forum West 2020. The global COVID-19 crisis has added a layer of complexity to the valuation process, requiring special care. As we predicted in our 2020 Top Ten Regulatory and Litigation Risks for Private Funds, ongoing economic uncertainty will likely lead to increased scrutiny on fund managers’ valuation of privately-held portfolio companies from both the SEC and investors. At the recent securities enforcement conference, Josh addressed the following potential risks.
- In light of recent events surrounding tech unicorn IPOs, regulators and investors are likely to take a hard look at all parties involved in unicorn valuations that, in hindsight, may have perhaps been too optimistic.
- Enforcement is also likely to focus on valuation and performance claims, particularly claims regarding performance based on unrealized gains, in marketing materials.
- The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) will continue to raise questions regarding valuations during exams. OCIE has made clear that it will focus on fund advisers that rely on third-party vendors, including vendors that provide valuation services.
- In light of economic uncertainty, credit funds may be fielding questions about their valuation of credit holdings as defaults, and the risk of defaults, increase.