The common fair value challenge: ‘I would never sell in this market’

In these current times of significant market volatility, there is one statement we hear more than any other when looking at the value of unquoted equity positions for financial or investor reporting purposes: ‘our intention is to hold rather than sell, I would never sell an asset such as this in this market’.

From a commercial and front office perspective, this may be absolutely true. However, for financial and investor reporting (under IFRS and US GAAP), the basis of value is an Exit Value. This assumes that there is a hypothetical market participant, even if there is no actual buyer identified for the position. It also assumes that there is no time to exit and work to prepare the asset for sale has already been performed by the valuation date (hence no lack of marketability discounts allowable under the International Private Equity and Venture Capital Guidelines (December 2018) (IPEV)).

The basis of value for financial reporting is a hypothetical market participant value. Therefore, holder specific intentions regarding the asset in question are not relevant. We commonly see clients arguing that any market participant would chose to hold rather than sell the asset in difficult market conditions but this is not consistent with the exit value concept in both IFRS, US GAAP and IPEV.

Finally, it is not possible to argue that an entire market is distressed. The market is the market as at the Valuation Date. Where there are very short term political shocks that create a peak or trough for a few days before the market normalises (as was the case following the Brexit referendum), some level of pragmatism is generally applied around read across to valuation of unquoted equity positions but longer term trends in listed markets cannot be ignored in financial reporting valuations.