Data resiliency during transformative markets: maintaining strong valuation processes when data dries up

Wednesday, September 30, 2020 | By Spencer Wilson, Business Development Director

Data resiliency during transformative markets:  maintaining strong valuation processes when data dries up

Market participants fear the unknown. Yet, in an era of truly unprecedented market turmoil and subsequent government intervention, it is more difficult than ever to predict even basic economic metrics in an effort to project a ballpark figure for global GDP in 2020. However, investors recognize that volatility leads to opportunity with new fund launches continuing in 2020, despite the volatility. Just in the first half of 2020, there have been 85 different SPAC filings[1], 139 Private Equity closings raising $41B[2], and 95 new Hedge Fund launches.[3]

Demand (and Requirements) for Transparency

Managers of illiquids face an especially challenging situation as investors clamor for the advantages of working with alternative asset managers while concurrently demanding increased transparency. This need for instant access to data represents a paradigm shift in investor expectations of fund managers in comparison to ten years ago. Victims of their own success, new flows continually bring more and more capital and a more diverse set of investors to alternative asset managers. Simultaneously, the next generation of asset allocators funding these commitments has become accustomed to instant access to information. A generational shift has occurred as many new investors are not comfortable with vague reports of opaque assets and investment structures.

In parallel, regulators have also increased oversight since the Global Financial Crisis in 2008 and high profile instances of fraud leading to Dodd-Frank rules spawning a number of risk-related regulatory reporting requirements such as Form PF, CPO/PQR and others for managers of private funds. Gone are the days when the only external reporting was sending limited partners investor statements.

The Need for More Data

Keeping both the investors and the regulators satisfied with their need for data is critical to a fund’s survival. A strong and robust data collection and management system must be present to supply audit partners timely and accurate information. It is essential for the data to be kept up to date and reflect a dynamic marketplace to ensure that the external accounting teams are able to maintain a fund’s clean bill of health. Although the administration of a fund can be burdensome due to its manual, complicated and ever-changing nature, the business side of the management firm can jeopardize even the most successful investment teams. Critical calculations like valuations can stale when previously held assumptions are no longer valid as cash flows hiccup, discount rates jump, and transaction data dries up.

Uncertainty in the real estate market has been widely publicized as firms decide when (or if) they will return to the physical office while retail accelerates the transition to an online-dominated industry. However, the basic tenets of valuation metrics remain the same across all business classes whether using the market, cost or income approach to determine fair market value. In that way, almost all unlisted asset classes require an update to their price modeling as market transactions are reduced (or may include inaccurate “fire sales”) and business operations have been halted (halting cash flows) while government intervention fluctuates (providing spurts of cash).

Making Adjustments as Market Fundamentals Change

As businesses wade through the unknowns, it is vital that they have the processes in place to flex and continue to provide data under this new environment. They must ensure their investors are confident in the internal systems in place to deal with the transition while recognizing the riskiness of new valuation calculations. Having an effective internal process means that an organization is able to follow pre-established rules and governance to shift their operations. One trigger might involve appropriate timing for acquiring a formal independent valuation at increased intervals according to the valuation policy. Another policy might increase the frequency of valuation-focused audit committee meetings to challenge updated valuation methodologies.

This transitioning from a market with regular data points to one without any data requires a shift to using models. Organizations may not have had previous issues with market data providing enough comparable transaction to derive fair market value. Pre-pandemic transaction data may not be useful considering the drastic shift in the way in which the world functions. There is now no guarantee that the past historical performance used as a basis for those pre-pandemic transactions will continue into the future. Now that modeling must replace actual transaction data, firms must ensure there are controls in place to continually validate the suitability of the model and that all changes are regularly tested. Many of the underlying factors of these models could also be fluid as lease terms change with abatements and extensions or government-mandated restrictions on evictions or layoffs.

Leveraging Change for Future Success

The data remains the essential component of this process, along with recognizing that which is internally derived and that which is being pulled from outside sources. Access to this data, storing it, managing it, processing it and reporting it all become necessary to a fund’s success or failure. As all firms are faced with this challenge, it will become a competitive advantage to have easier access to harder-to-find data and to be able to disseminate that information effectively to inspire confidence with investors, regulators and audit partners.  

To find out more, join us for our upcoming webinar on Dislocations in Valuations; Operational Reporting and Communications in a Market Correction. Register here




[3] “Hedge Funds in Q2 20” from HFM;

Alternative Investments, Fund Administration, Real Estate & Property Management

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