Portfolio Valuations

Portfolio Valuations: Level 3 Securities Valuations


Hello, my name is John Bintz. I’m here with John Czapla. We are both managing directors at Valuation Research Corporation. John is also a senior partner and heads the firm’s portfolio valuation practice. The practice itself has deep experience in the financial services sector, including some of the largest private equity funds, hedge funds, banks and publicly traded and non-publicly traded business development companies in the world. John, what does your valuation practice do?

John Czapla: John, we value all types of liquid or non-marketable securities. They can be from loans, to bonds, to various forms of equity, as well as very structured products. They can span across many industries, as well as many segments in the market, small cap, mid cap, large cap. Our valuations are often done on a recurring basis, typically quarterly.

John Bintz: And why do your clients require a portfolio valuation?

John Czapla: It’s mainly for fair value reporting requirements under U.S. GAAP, but also all of our clients need to report to their investors performance measurements, specifically unrealized gains. Also, our hedge fund clients typically need to come up with fair values for NAV calcs for investors coming in and out of funds, as well as a basis for the management fees. And lastly, some of our leverage fund clients need fair values of the collateral to report to the lenders for specific borrowing base or coverage tests.

John Bintz: And why would a client outsource this function, as opposed to doing it in house?

John Czapla: Our clients and our board of directors are under immense scrutiny to report fair values accurately from investors, from their auditors, from regulators. Valuation isn’t a black box. It can be a pretty complex process. So, ultimately our clients are looking to improve documentation and their valuation process, increase transparency and independence, and ultimately to mitigate performance measurements and risks.

John Bintz: And what are some of the factors that a firm would look for in hiring a valuation firm?
John Czapla: Well, you should have specific experience with the client’s securities. So, you should ask for a client list and also maybe a sample report, as well sample market data. At VRC we have a monthly market monitor at various segments of the market that we often give to potential clients. And also, having experience over a long time providing accurate and timely valuations. So a potential client should ask for client references, as well as inquire about customer longevity and turnover. And lastly, we think it’s critical to have a partner directly involved in the process to control quality and timeliness of the product.
John Bintz: And what about fees associated with this type of service?
John Czapla: Fees are always an issue, John, but I would say the lowest fees might always be the most cost effective for our client. Having a quality valuation provider and a process can lower internal costs, as well as external costs in terms of reduced audit time and fees, as well as potential future litigation.

John Bintz: John, thank you very much for your knowledge and your expertise and your information on this subject matter.

John Czapla: Thanks, John.

John Bintz: You bet.