Fund Managers’ Reporting


Fund managers communicate in manifold ways with their fund investors in order to inform about the current status, the performance and the expected development of the funds. Regular reporting is an integral part of this communication and seen as one of the most important information sources for private equity investors.565


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  1. 565.
    See Hagenmüller (2004), p. 130.Google Scholar
  2. 566.
    See Thoen (2002), p. 23; Böhler (2004b), p. 169.Google Scholar
  3. 567.
    See Pellens/ Fülbier/ Gassen (2006), p. 151. These are, for example, the required components of financial statements according to IFRS which are prescribed in IAS 1.8.Google Scholar
  4. 568.
    See Brooks (1999), p. 114.Google Scholar
  5. 569.
    TUCK find through a survey among U.S. private equity market participants that about 50% of the U.S. private equity fund managers and about 75% of their U.S. fund investors wish the limited partnership agreement should govern the transparency and detail of fund and portfolio company valuation reporting. See Tuck (2004b), p. 16.Google Scholar
  6. 570.
    See AFIC/ BVCA/ EVCA (2004), p. 7; Böhler (2004b), p. 169.Google Scholar
  7. 571.
    See SECA (2006), p. 26.Google Scholar
  8. 572.
    This is true for both IFRS and U.S. GAAP. See AFIC/ BVCA/ EVCA (2004), p. 7; Snow (2006), p. 30.Google Scholar
  9. 573.
    See Thoen (2002), p. 23.Google Scholar
  10. 574.
    See for more details on the development of international accounting standards Achleitner/ Behr (2002), pp. 3 et seq.Google Scholar
  11. 575.
    See Bane (2005), p. 2.Google Scholar
  12. 576.
    See Thomson (2004), p. 25.Google Scholar
  13. 577.
    See European Commission (2002), article 4.Google Scholar
  14. 578.
    See McCurry (2005), p. 44. Examples are ABN AMRO Capital, Allianz Capital Partners, Barclays Capital.Google Scholar
  15. 579.
    See Bane (2005), p. 2. BÖHLER finds that around 70% of Swiss private equity fund investors favour IFRS as accounting standard for funds. 24% of the investors prefer U.S. GAAP. See Böhler (2004b), p. 186.Google Scholar
  16. 580.
    See Böhler (2004b), p. 183.Google Scholar
  17. 581.
    See FASB/ IASB (2006), p. 1. Both IASB and FASB agreed on a roadmap for convergence between IFRS and U.S. GAAP for the period from 2006 to 2008 and identified several issues where convergence should be achieved.Google Scholar
  18. 582.
    See FASB/ IASB (2006), p. 3.Google Scholar
  19. 584.
    See McCurry (2005), p. 43.Google Scholar
  20. 586.
    U.S. GAAP also requires their fund managers to measure their investment at a fair value. See Snow (2006), p. 30.Google Scholar
  21. 587.
    See Ernst & Young (2004), p. 137.Google Scholar
  22. 588.
    For models of these elements for private equity funds see Böhler (2004b), pp. 187 et seq.Google Scholar
  23. 589.
    See Gompers/ Lerner (1996), p. 485. The authors show that 95.6% of U.S. private equity funds are restricted to use debt.Google Scholar
  24. 590.
    To finance their investments, private equity investors use debt (financial leverage). However, the debt is taken on directly by the financed companies themselves. See Levin (2002) for detailed information on the structuring of portfolio company investments.Google Scholar
  25. 591.
    See Böhler (2004b), p. 192.Google Scholar
  26. 592.
    See Schell (2006), chap. 9, p. 21.Google Scholar
  27. 593.
    See Böhler (2004b), p. 194.Google Scholar
  28. 595.
    The fee income, e.g. break-up, transaction or monitoring fees, could relate to the fund’s investment transactions or it could relate to subsequent relationships with portfolio companies. See Schell (2006), chap. 2, p. 35.Google Scholar
  29. 596.
    See Schell (2006), chap. 2, p. 39.Google Scholar
  30. 597.
    See Böhler (2004b), p. 198.Google Scholar
  31. 599.
    See Ernst & Young (2004), p. 168.Google Scholar
  32. 600.
    It does not deal with the investments that are accounted for in accordance with IAS 27 (subsidiaries), IAS 28 (associates) or IAS 31 (joint ventures). For more details on these types see chapter 4.2.3.Google Scholar
  33. 601.
    IFRS 7 is effective for annual periods beginning after January 1, 2007.Google Scholar
  34. 602.
    See Böhler (2004b), p. 200.Google Scholar
  35. 605.
    Theoretical foundation of the use of different financial instruments in private equity transactions is based on the principal agent setting between the fund and the entrepreneurs. This is elaborated mainly in literature concerning venture capital contracting although some conclusion can be drawn also for buyout finance structures. See among others Bascha/ Walz (2001); Bergemann/Hege (1998); Berglöf (1994); Hellmann (2006); Rudolph/Haagen (2004); Schmidt (2003). For a review see Jung-Senssfelder (2006), pp. 31 et seq. Empirical evidence about the financial instruments that are actually used is among others provided by Kaplan/Strömberg (2003) for the U.S., Bottazzi/Da Rin/Hellmann (2004) for Europe, and Bascha/Walz (2002), Hommel/Ritter/Wright (2003) for Germany. For a review see Jung-Senssfelder (2006), p. 42.Google Scholar
  36. 606.
    See Ernst & Young (2004), p. 938.Google Scholar
  37. 607.
    IAS 32, Financial Instruments and Disclosure, determines the differentiation of equity and liabilities from an issuer’s perspective. The appliance of these rules for a holder of the instruments seems to be appropriate. See Löw/ Lorenz (2005), p. 494. The differentiation between equity and debt according to IAS 32 is a complex issue. For a detailed discussion of the classification of financial instruments as equity or liability see among others Isert/Schaber (2005a) and Isert/Schaber (2005b).Google Scholar
  38. 608.
    See Fingerle (2005), p. 79; Jung-Senssfelder (2006), p. 22. Public and private preference shares should be distinguished. The former usually have special dividends and liquidation preferences but no voting rights whereas the latter carry additional investor rights, sometimes giving their holders a more powerful position in comparison to common stock holders. Traditional public preference shares show rather debt characteristics. Private preference shares are classified as mezzanine or equity. See Bagley/Dauchy (1999), p. 272; Wahl (2004), p. 162.Google Scholar
  39. 609.
    See Kaplan/ Strömberg (2003), p. 286. Convertible preferred equity consists of preferred equity combined with an option to convert into straight equity. See Jung-Senssfelder (2006), p. 24. Typically, it automatically converts to common stock if the company makes an initial public offering. See Tuck (2003b), p. 4.Google Scholar
  40. 610.
    For the use of redeemable preferred stock in venture capital structures see Lerner/ Hardymon (2005), pp. 289 et seq.Google Scholar
  41. 611.
    See Kühn (2006), p. 95.Google Scholar
  42. 612.
    Silent partnerships account for 19.6% of the investments by German private equity funds in 2005. See BVK (2006), p. 16.Google Scholar
  43. 613.
    A typical silent partner participates in company profits, has limited control rights, can be granted limited liability protection, and has a subordinated claim to debtholders. According to German commercial and tax law the silent partnership represents a liability position. An atypical silent partner participates in addition in company growth and in liquidation results. Therefore, German law assign the position to equity in the balance sheet. See Kühn (2006), pp. 24 et seq; Rudolph/Haagen (2004), p. 19.Google Scholar
  44. 614.
    Mezzanine instruments could be for example convertible debt, warrant-linked debt, or debt with equity kickers. For details of selected mezzanine instruments see Achleitner/ Wahl (2004), pp. 65 et seq; Wahl (2004), pp. 140 et seq; Kühn (2006), pp. 99 et seq; Tuck (2003b), pp. 3 et seq.Google Scholar
  45. 615.
    See Kühn (2006), p. 99.Google Scholar
  46. 616.
    For a detailed discussion see for example Poole/ Spooner (2006); Kuhn/Scharpf (2005).Google Scholar
  47. 618.
    See Nathusius (2005) for syndication in venture capital and Dresdale (2004) for so-called ‘club deals’ of buyout funds.Google Scholar
  48. 619.
    See Böhler (2004b), p. 205.Google Scholar
  49. 620.
    See IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39, Financial Instruments: Recognition and Measurement. Additionally, IFRS 7, Financial Instruments: Disclosures, prescribes the disclosures about financial instruments in the financial statements. The additional disclosure allows users of financial statements to evaluate the relevance of financial instruments for the reporting entity’s financial position and performance. It clarifies the nature and extent of risks arising from financial instruments to which the reporting entity is exposed and how the entity manages those risks. It was issued in August 2005 and replaced IAS 30 and some parts of IAS 32. See IASB (2005); Pellens/Fülbier/Gassen (2006), pp. 545 et seq.Google Scholar
  50. 621.
    See Kuhn/ Scharpf (2005), p. 74.Google Scholar
  51. 622.
    See Ernst & Young (2004), p. 828; Bane (2005), p. 3.Google Scholar
  52. 623.
    For a detailed discussion see Bane (2005), p. 4.Google Scholar
  53. 624.
    See Ernst & Young (2004), p. 830. For a detailed description about what constitutes an asset as held-for-trading see Löw/Lorenz (2005), p. 484; Ernst & Young (2004), p. 830Google Scholar
  54. 625.
    With its Amendments to IAS 39 Financial Instruments: Recognition and Measurement — The Fair Value Option (issued June 2005) the IASB limited the ability for an entity to designate any financial asset or financial liability as at fair value through profit or loss (FVTPL). It responded to a number of commentators, including the European Central Bank, the Basel Committee and the EU Commission that expressed concerns that the fair value option in the revisions to IAS 39 in December 2003, which permitted any financial instrument to be designated as at FVTPL on initial recognition, may be used inappropriately. See Deloitte (2005), p. 1. However, IAS 39.AG4I specifically states that venture capital organizations whose business is investing in financial assets with a view to profiting from their total return in form of interest or dividends and changes in fair value may chose to designate its investment as at fair value through profit and loss.Google Scholar
  55. 626.
    Theoretically, they might be classified as held-for-trading. See Ernst & Young (2004), p. 831.Google Scholar
  56. 627.
    IFRS give no further definition of the term’ significant’. See Böhler (2004b), p. 209.Google Scholar
  57. 628.
    See Ernst & Young (2004), p. 1024.Google Scholar
  58. 629.
    See Bane (2005), p. 5.Google Scholar
  59. 630.
    See Poole/ Spooner (2006), p. 152.Google Scholar
  60. 631.
    See Bane (2005), p. 4.Google Scholar
  61. 632.
    Based on Ernst & Young (2004), p. 1021.Google Scholar
  62. 634.
    IAS 21: The Effects of Changes in Foreign Exchange Rates defines monetary items as units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency (IAS 28.8). For monetary items the difference in value resulting from changes in exchange rates is recognized in profit or loss (IAS 39.55b and IAS 39.AG83). For a detailed description see Poole/ Spooner (2006), pp. 157 et seq.Google Scholar
  63. 635.
    Assets that are classified as fair value through profit or loss but not measured at fair value, i.e. held-for-trading assets whose fair values cannot be reliably determined, are also subject to an impairment review. See Ernst & Young (2004), p. 1013.Google Scholar
  64. 636.
    See Poole/ Spooner (2006), p. 184. Neither’ significant’ nor “prolonged” is defined or further explained. A significant decline in value might be defined as a decrease of the present value by a certain percentage, e.g. 20% below the book value. A prolonged decline might be given if over a certain period of time, e.g. 9–12 month, the present value was below the book value.Google Scholar
  65. 637.
    Based on an example on fund-of-funds level in Baker/ Luff (2005), p. 6.Google Scholar
  66. 638.
    See Löw/ Lorenz (2005), p. 493.Google Scholar
  67. 640.
    See Ernst & Young (2004), p. 812; Poole/Spooner (2006), p. 105.Google Scholar
  68. 641.
    See Ernst & Young (2004), p. 818 for an example.Google Scholar
  69. 642.
    For more details on the accounting for embedded derivatives see Poole/ Spooner (2006), pp. 105 et seq; Ernst & Young (2004), pp. 812 et seq.Google Scholar
  70. 643.
    Bane (2005), p. 4.Google Scholar
  71. 644.
    See Löw/ Lorenz (2005), p. 493.Google Scholar
  72. 647.
    See Ernst & Young (2004), p. 465. The standard further differentiates circumstances that will be usually evidence of significant influence, e.g. representation on the board of directors, participating in policy-making processes, material transactions between investor and investee (IAS 28.7).Google Scholar
  73. 648.
    See Bane (2005), p. 9.Google Scholar
  74. 649.
    IFRS describes the equity method in IAS 28.11. Essentially, it means that the investment is initially recorded at cost and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the investee. The investor’s share of profit and loss of the investee is recognized in the investor’s profit or loss. For details see Ernst & Young (2004), pp. 469 et seq.; Baetge/Kirsch/Thiele (2004), pp. 397 et seq.; Pellens/Fülbier/Gassen (2006), pp. 742 et seq.Google Scholar
  75. 650.
    See Ernst & Young (2004), p. 487. It is somewhat more complex since three different types of joint ventures, i.e. jointly controlled operations, jointly controlled assets, and jointly controlled entities have to be distinguished.Google Scholar
  76. 651.
    See Ernst & Young (2004), p. 488. IFRS defines proportionate consolidation in IAS 31.3. Its application means that the balance sheet of the joint venturer includes its share of the assets that it controls jointly and its share of the liabilities for which it is jointly responsible. The profit and loss statement of the joint venturer includes its share of the income and expenses of the jointly controlled entity (IAS 31.33). See also Ernst & Young (2004), pp. 499 et seq.; Baetge/Kirsch/Thiele (2004), pp. 376 et seq.; Pellens/Fülbier/Gassen (2006), pp. 736 et seq. for details.Google Scholar
  77. 653.
    See Ernst & Young (2004), p. 300.Google Scholar
  78. 654.
    Currently, the IASB work on a new IFRS on consolidation to replace IAS 27 and SIC-12, Consolidation — Special Purpose Entities. The control criteria within a single IFRS should be developed for all entities, including special purpose entities. See IASB (2006a).Google Scholar
  79. 655.
    See Bane (2005), p. 7.Google Scholar
  80. 656.
    See Fingerle (2005), pp. 113 et seq.Google Scholar
  81. 657.
    See Baetge/ Kirsch/ Thiele (2004), p. 142.Google Scholar
  82. 659.
    See Baetge/ Kirsch/ Thiele (2004), p. 142.Google Scholar
  83. 661.
    Based on PWC (2006).Google Scholar
  84. 662.
    See Achleitner/ Müller (2004), p. 15.Google Scholar
  85. 663.
    Böler showed that eight out of eleven Swiss private equity companies that published annual reports in 2002 according to IFRS did not consolidate their investments. The remaining three funds did not invest in more than 20% of the equity stake. See Böhler (2004b), p. 211.Google Scholar
  86. 664.
    See EVCA (2003a).Google Scholar
  87. 665.
    See EVCA (2003a), p. 5.Google Scholar
  88. 666.
    See Achleitner/ Müller (2003), p. 5.Google Scholar
  89. 667.
    The improvements project included the revision of IAS 27 and IAS 28. See Ernst & Young (2004), p. 464.Google Scholar
  90. 668.
    See EVCA (2002b), pp. 1 et seq; EVCA (2003b); Anonymous author (2003), p. 410; Becker (2004), p. 46. For the position of the IASB see IASB (2002), pp. 8 et seq.Google Scholar
  91. 670.
    At the end of 2001, it was revealed that Enron, an American energy company, sustained its reported financial condition mostly by systematic and creatively planned accounting fraud. It finally filed for bankruptcy. For details on the case of Enron see Healy/ Palepu (2003).Google Scholar
  92. 671.
    See European Commission (2006), pp. 23 et seq.Google Scholar
  93. 672.
    Quoted in Thomson (2004), p. 25.Google Scholar
  94. 673.
    See Ernst & Young (2004), p. 371. The IASB presents its view at some length in IAS 27, Basis for Conclusions (IAS 27.BC16-23).Google Scholar
  95. 674.
    See European Commission (2006), p. 12.Google Scholar
  96. 675.
    For a detailed differentiation of trade groups and private equity entities see Achleitner/ Müller (2004), pp. 14 et seq.Google Scholar
  97. 676.
    See Elliott/ Elliott (2005), p. 513.Google Scholar
  98. 678.
    See Achleitner/ Müller (2004), p. 30.Google Scholar
  99. 679.
    For more details on the purpose of consolidated financial statements see among others Busse von Colbe et al. (2003), pp. 26 et seq.Google Scholar
  100. 681.
    See Achleitner/ Müller (2004), pp. 20 et seq.Google Scholar
  101. 682.
    See European Commission (2006), p. 12.Google Scholar
  102. 683.
    See Achleitner/ Müller (2004), p. 23.Google Scholar
  103. 684.
    See McCurry (2005), p. 44.Google Scholar
  104. 685.
    McCurry (2005), p. 45.Google Scholar
  105. 686.
    In venture capital, multiple financing rounds depending on the achievement of milestones (socalled staging) are commonly agreed on. The valuation of the company and the resulting ownership share of the entrepreneurs regularly depend on the achievement of milestones. See Engel (2003), p. 285. In buyout companies, multiple financing rounds are less common.Google Scholar
  106. 687.
    See Böhler (2004b), p. 219.Google Scholar
  107. 688.
    GIMV (2006), p. 76.Google Scholar
  108. 689.
    See Bane (2005), p. 7. Obtaining the relevant financial information from subsidiaries can be difficult. Financial statements of parent and subsidiaries shall be prepared at the same reporting date (IAS 27.26). Furthermore, the accounting policies of parent and subsidiary must be consistent (IAS 27.29). Funds might need to invest in new accounting and reporting systems. See McCurry (2005), p. 44.Google Scholar
  109. 690.
    See Thomson (2004), p. 24.Google Scholar
  110. 692.
    See AICPA (2000), paragraph 7.04.Google Scholar
  111. 693.
    See AICPA (2000), paragraph 1.32.Google Scholar
  112. 694.
    In December 2002, the Accounting Standard Executive Committee (AcSEC) of the AICPA issued an exposure draft of a statement of opinion (SOP) concerning the clarification of the scope of the as well as the accounting by parent companies and equity method investors, for investments in investment companies. An updated version of the exposure draft was issued in December 2005. See AICPA (2006).Google Scholar
  113. 695.
    This is somewhat odd since these entities are refrained from using the equity method or proportional consolidation when accounting for associate investments or joint ventures (IAS 28.1 and IAS 31.1). Explicitly named by the standards are ‘venture capital organizations and similar entities’, but private equity entities are subsumed. U.S. GAAP uses the term investment companies. See AICPA (2005).Google Scholar
  114. 697.
    See Ruhnke/ Nerlich (2004), pp. 389 et seq.Google Scholar
  115. 698.
    See AICPA (2005).Google Scholar
  116. 699.
    See Achleitner/ Müller (2004).Google Scholar
  117. 700.
    A similar approach is suggested by AICPA. See AICPA (2005).Google Scholar
  118. 701.
    See Achleitner/ Müller (2004), p. 31.Google Scholar
  119. 702.
    See Feinendegen/ Schmidt/ Wahrenburg (2003), p. 1180; Gompers/Lerner (1996), p. 485.Google Scholar
  120. 703.
    An agreement to exit the investment is usually documented in the financing contracts between the private equity entities and their investees. See Achleitner/ Müller (2004), p. 31.Google Scholar
  121. 704.
    See Löw/ Lorenz (2005), p. 498.Google Scholar
  122. 706.
    Based on Achleitner/ Müller (2004), p. 33; AICPA (2005), pp. 14 et seq.Google Scholar
  123. 707.
    See for this and the following argumentation Böhler (2004b), pp. 263 et seq.Google Scholar
  124. 708.
    See Böhler (2004b), p. 263.Google Scholar
  125. 709.
    See Böhler (2004b), p. 274.Google Scholar
  126. 710.
    Kaserer/Diller for example conclude that GP’s skills have a significant influence on the fund’s return. See Kaserer/ Diller (2004d), p. 18.Google Scholar
  127. 711.
    See Kuhn/ Scharpf (2005), p. 238.Google Scholar
  128. 712.
    It is necessary to distinguish the valuation for reporting purpose (post-investment stage) from the valuation that is carried out at a pre-investment stage. The latter is pursued in order to support the investment decision. It is different with respect to the level of information that is available, to the valuation techniques that can be used, and to the financial and time resources that the fund manager is able to spend. See Böhler (2004b), p. 220. Much more time and money can be spent when valuing the investment for investment decisions. For a general summary of the different valuation purposes and functions see for example Ballwieser (2004), p. 2; Achleitner/Nathusius (2004), pp. 14 et seq.Google Scholar
  129. 714.
    See Blaydon/ Wainwright (2004a), p. 45. This approach was based on a set of guidelines that had been proposed to the U.S. National Venture Capital Association (NVCA) in 1989. Chapter 4.3.4 provides details on industry valuation guidelines.Google Scholar
  130. 715.
    There are also definitions with the same meaning but with a slightly different wording in IAS 16.6, IAS 18.7, IAS 19.7, IAS 20.3 and IAS 40.5. U.S. GAAP defines fair value in the SFAS 157, Fair Value Measurement as follows: ‘Fair value is the price that would be received for an asset or paid for a liability in a transaction between market participants at the measurement date.’ See Lüdenbach/ Freiberg (2006), p. 437. However, BIEKER demonstrates that despite the different wording the actual requirements are the same. See Bieker (2006), pp. 7 et seq.Google Scholar
  131. 716.
    See Dohrn (2004), p. 3. This is true for the definition of fair value according to IFRS as well as the definition according to U.S. GAAP. See Bieker (2006), p. 8; Feldman (2005), p. 2.Google Scholar
  132. 717.
    See Dohrn (2004), p. 3; Feldman (2005), p. 2.Google Scholar
  133. 718.
    See Mercer (1999), p. 20.Google Scholar
  134. 719.
    See Feldman (2005), p. 3; Bieker (2006), p. 8.Google Scholar
  135. 720.
    See Bieker (2006), p. 8; Dohrn (2004), p. 126. U.S. GAAP refer to market participants whereas IFRS use the term at arm’s length but the economic meaning is the same.Google Scholar
  136. 721.
    See Barth/ Landsman (1995), p. 99.Google Scholar
  137. 722.
    See Beaver (1987), p. 67; Bieker (2006), p. 9.Google Scholar
  138. 723.
    See IASB (2006b), p. 2; Dohrn (2004), p. 121. This is equivalent to U.S. GAAP.Google Scholar
  139. 725.
    See Achleitner et al. (2004b), p. 707. The authors find in a study among funds in German speaking countries that in 83% of the cases the investment managers, and in around 30% a special finance team, are involved in the valuation process. Percentages will not add up to 100% because respondents could check more than one answer.Google Scholar
  140. 726.
    See Böhler (2004b), pp. 245 et seq.Google Scholar
  141. 727.
    Good practice could be that the fund managers consult with co-investors on valuation issues. See Lerner/ Hardymon/ Leamon (2005), p. 418.Google Scholar
  142. 728.
    Investors usually ask for audited reports once a year. See PwC (2003), p. 23. Sometimes auditors specifically sign off on the valuations.Google Scholar
  143. 729.
    See Böhler (2004b), p. 251. In practice, the auditors will not test each valuation. They concentrate on the process and the internal controls. See PwC (2003), p. 23.Google Scholar
  144. 730.
    See Lerner/ Hardymon/ Leamon (2005), p. 418; Böhler (2004b), p. 251. As has been shown in chapter 3.5.1, this is a valuable task of advisory boards according to fund investors.Google Scholar
  145. 731.
    See Snow (2004), p. 43. There could be even three kinds of reported valuations: valuations in financial statements, valuation projections in investors reporting, and valuation estimates in private placement memoranda of new raised funds. The latter are intended to get the attraction of potential new investors.Google Scholar
  146. 732.
    See Michas (1997), p. 1. Valuations may be important in internal evaluations of investment managers. See Thoen (2002), p. 6. They indicate the progress on a regular basis which may lead to strategic decisions about an investment’s future. Having analyzed how comparable companies are valued in the public or private markets, fund managers may conclude to make adjustments to a planned exit strategy to take advantage of certain trends or market conditions. Valuation analysis reveals how the markets evaluate and reward particular attributes of companies in a given industry. Fund managers can then influence the corporate strategy to position the company to achieve the highest possible equity valuation upon an exit or public offering.Google Scholar
  147. 734.
    See Bellavite-Hövermann/ Barckow (2003), p. 78; Poole/Spooner (2006), pp. 169 et seq. Amounts that would be received or paid in a forced transaction, involuntary liquidation, or distress sale are therefore not a fair value (IAS 39.69).Google Scholar
  148. 735.
    See Dohrn (2004), p. 147. Non-adjusting events are indicative of conditions that impact the value of the assets but that arose after the balance sheet date (IAS 10.3).Google Scholar
  149. 736.
    See Ernst & Young (2004), p. 1017.Google Scholar
  150. 738.
    See Ernst & Young (2004), p. 1018.Google Scholar
  151. 739.
    See Poole/ Spooner (2006), p. 6.Google Scholar
  152. 740.
    Exemptions are two different cases, so-called private investments in public equity (PIPE) and already public shares of private equity portfolio company investments that are under a legal or contractual restriction to sell (so-called lock-up period). PIPE transactions are usually structured as a minority investment in a publicly listed company. The investor does not receive the full array of control rights and protections that a private equity sponsor is used to receive in a common leveraged buy-out transaction. See Kuzneski/ Landen (2006). The other case is where after filing for an IPO the private equity fund managers are restricted to sell their share for some period of time.Google Scholar
  153. 741.
    See Poole/ Spooner (2006), p. 174. The valuer should consider the risk that a valuation techniques is incorrectly specified, that improbable assumptions are used, or that it does not mirror the true behaviour of the market.Google Scholar
  154. 742.
    See Poole/ Spooner (2006), p. 174.Google Scholar
  155. 744.
    See SECA (2006), p. 28.Google Scholar
  156. 745.
    See Poole/ Spooner (2006), p. 169. The underlying assumption of the predominant request to use market data is that markets are efficient.Google Scholar
  157. 746.
    See Lüdenbach/ Freiberg (2006), p. 440; Poole/Spooner (2006), p. 169.Google Scholar
  158. 748.
    For an overview of the use of fair value accounting in IFRS see Dohrn (2004), p. 116.Google Scholar
  159. 749.
    See IASB (2006c), p. 4. The project is explicitly not intended to require additional fair value measurement or to increase the use of fair value in IFRS.Google Scholar
  160. 750.
    See IASB (2006b), p. 2.Google Scholar
  161. 751.
    There is, for example, divergent guidance in FAS 157 and IAS 39 with respect to the fair value at initial recognition. FAS 157 clearly postulates that the fair value is conceptually an exit value. It defines fair value of an asset as the price that would be received in a transaction between knowledgeable market participants. See Hitz (2006), p. 361. IAS 39 accepts the transaction price of an asset as fair value at initial recognition (IAS 39.AG64) which is conceptually different. See IASB (2006b), p. 3. As a result of an approval of the exit price definition of fair value, in circumstances where an asset is required to be measured at fair value on initial recognition a day-one gain or loss may be identified.Google Scholar
  162. 752.
    See Lüdenbach/ Freiberg (2006), p. 440.Google Scholar
  163. 753.
    See Böhler (2004b), p. 224.Google Scholar
  164. 754.
    All relevant industry guidelines are intended to guide valuation for reporting purposes and not to influence the valuation when entering the investment or negotiating with potential sellers or entrepreneurs. See Achleitner/ Nathusius (2004), p. 23.Google Scholar
  165. 755.
    See Thoen (2002), p. 20. So far, no industry association require its member to apply guidelines. Fund investors sometimes insist on having their general partners follow those guidelines.Google Scholar
  166. 756.
    See Schefczyck/ Pankotsch (2005), p. 312.Google Scholar
  167. 757.
    See Thoen (2002), p. 20.Google Scholar
  168. 758.
    See Harrell/ Spiegel (2004), p. 16. Guidelines foster that the industry provides a solution itself rather then having regulators step in imposing them. See Boersma/Brown/Franklin (2005), p. 33.Google Scholar
  169. 759.
    See Meyer/ Mathonet (2005), p. 160. Some discussants maintain that “valuation is an art, not a science.” See Harrell/Spiegel (2004), p. 17.Google Scholar
  170. 760.
    See Harrell/ Spiegel (2004), p. 17. For example, a general partnership might be sued by investors for presenting fraudulent information on valuation during its fundraising.Google Scholar
  171. 761.
    See Lerner/ Hardymon/ Leamon (2005), p. 410, for a reprint of the propositions of the NVCA.Google Scholar
  172. 762.
    See Lerner/ Hardymon/ Leamon (2005), p. 413; Blaydon/Wainwright (2004a), p. 45.Google Scholar
  173. 763.
    See Blaydon/ Wainwright (2004a), p. 45; Blaydon/Horvath/Wainwright (2002), p. 97.Google Scholar
  174. 764.
    See Lerner/ Hardymon/ Leamon (2005), p. 419.Google Scholar
  175. 765.
    See Blaydon/ Wainwright (2004a), p. 46.Google Scholar
  176. 766.
    See PEIGG (2007).Google Scholar
  177. 767.
    See PEIGG (2006); Borell (2003b), p. 33.Google Scholar
  178. 768.
    See NVCA (2006); Braunschweig (2004), p. 25. Another important industry group in the U.S. is the Institutional Limited Partners Association (ILPA) which organizes the interests of limited partner investors in the global private equity industry. It endorsed the PEIGG guidelines. See ILPA (2004).Google Scholar
  179. 769.
    See Harrell/ Spiegel (2004), pp. 20 et seq.Google Scholar
  180. 770.
    See Crawford-Ingle/ Kempen/ Vickery (2003).Google Scholar
  181. 771.
    EVCA suggested either a conservative value or fair value approach for valuing portfolio company investments, depending on the development stage of the company. Furthermore, the guidelines proposed discounts for illiquidity that were not in line with IFRS. For a detailed discussion why the former EVCA guidelines were not compatible with IFRS see Böhler (2004b), pp. 225 et seq.Google Scholar
  182. 772.
    In an industry panel conducted by EVCA, half of the participants expected future regulation on European or national level to be targeted towards more transparency, reporting and governance. See EVCA (2006a), p. 3.Google Scholar
  183. 773.
    See Achleitner/ Müller (2005), pp. 69 et seq.Google Scholar
  184. 774.
    See Private Equity Valuation (2006). There has been a new release of the AFIC/BVCA/EVCA guidelines in 2006. However, the changes were mainly driven by wording issues. Therefore, in this analysis it is only referred to the issue released in 2005.Google Scholar
  185. 775.
    Endorsements as of June, 2006. See Kuan (2006), p. 8; Private Equity Valuation (2006); Guennoc (2006), p. 126.Google Scholar
  186. 776.
    The CFA Institute is a professional association that, among other tasks, developed and proposed policies, practices, and standards that improve the integrity of the global capital markets. It comments on important issues impacting investor protection, corporate disclosures, market regulations, ethics, and professionalism in the investment community worldwide. See Borell (2003a), p. 34; Kennedy (2005), p. 24.Google Scholar
  187. 777.
    See Boersma/ Brown/ Franklin (2005), p. 33; CFA Institute (2005). The CFA Institute recognized that performance standards have little value if the underlying valuation of portfolio company investments is unclear. Consequently, it developed also valuation guidelines as part of its standards. Additionally, it issued Interpretive Guidance for Private Equity to facilitate the application of its rules. See CFA Institute (2006).Google Scholar
  188. 778.
    See CFA Institute (2004), p. 6; Boersma/Brown/Franklin (2005), p. 34.Google Scholar
  189. 779.
    See CFA Institute (2006); Kennedy (2005), p. 24; Boersma/Brown/Franklin (2005), p. 34.Google Scholar
  190. 782.
    However, in a survey among U.S. fund managers, 46% of venture capitalists and 29% of buyout fund managers believe that convergence will not happen. Overall, many GPs think it will take at least 5–10 years until convergence might be achieved. See Tuck (2005), p. 18.Google Scholar
  191. 784.
    Similar attempts to compare valuation guidelines have been made by several researchers. These studies however cover outdated guidelines rather than the new developed ones as shown here. See for example Harrell/ Spiegel (2004), pp. 18 et seq; zu Knyphausen/Kittlaus/Seeliger (2003), p. 555; Hagenmüller (2004), p. 172.Google Scholar
  192. 785.
    The synopsis is based on the text of the guidelines. See AFIC/ BVCA/ EVCA (2004); PEIGG (2007).Google Scholar
  193. 786.
    See Achleitner/ Müller (2005), p. 71.Google Scholar
  194. 787.
    They base their study on the portfolio of the European Investment Fund (EIF) which comprises more than 200 European mainly venture capital and mid-market funds. The authors state that 91% of all funds value their investments in compliance with IAS 39. See Mathonet/ Monjanel (2006), pp. 4 et seq. Previous studies found similar results with respect to the old EVCA guidelines. Hielscher/Zelger/Beyer show that 75% of European funds applied the guidelines in 2002. See Hielscher/Zelger/Beyer (2003), p. 504. Hagenmüller finds that 80% of European general partners apply EVCA valuation guidelines. See Hagenmüller (2004), p. 174.Google Scholar
  195. 788.
    See Tuck (2005), p. 8.Google Scholar
  196. 789.
    See Tuck (2005), p. 9. Increased volatility in valuations and little interest from LPs are important factors to at least a quarter of respondents that do not adopt PEIGG (23% and 28%, respectively).Google Scholar
  197. 790.
    See Moll (2004), p. 16.Google Scholar
  198. 791.
    See Kustner (2002), p. 193. A controlling investment is considered to be of greater value than a minority investment as the controlling shareholder has the ability to effect changes in the overall business structure and to influence the company’s business policies. See Feldman (2005), p. 105.Google Scholar
  199. 792.
    See Moll (2004), p. 18.Google Scholar
  200. 793.
    Fingerle provides a comprehensive overview of the risks of exit obstruction that venture capitalists face. Management and other shareholders could oppose an exit for any reason. They might refuse an exit via certain exit channel, e.g. if the entrepreneur does not want to sell to a specific competitor out of personal reasons. Also, the timing of the exit or its valuation might be issues of argumentation. See Fingerle (2005), pp. 109 et seq.Google Scholar
  201. 794.
    See Greenberger (2001), p. 47. Alignment of interests means that the economic value of all investors is tied together so that the value derived from the investment is shared strictly pro rata by all investors. Various disinvestment rights protect the private equity fund: Tag-along rights assure that the private equity manager can participate in any sale of the management, usually on a pro rata basis. See Greenberger (2001), p. 49. Drag-along rights require the management and/or other shareholders to sell their shares to a third party if the private equity manager sells its interests. See Greenberger (2001), p. 51. For other disinvestment rights see Fingerle (2005), pp. 132 et seq.Google Scholar
  202. 795.
    Only in rare situations where the fund has little ability to influence the timing of the realization and the likelihood of a realization is low, fair value will be directly derived mainly from the expected cash flows and risks of the relevant financial instruments. See AFIC/ BVCA/ EVCA (2004), p. 12.Google Scholar
  203. 796.
    Based on the process described in AFIC/ BVCA/ EVCA (2004), p. 9.Google Scholar
  204. 797.
    The value derived by the valuation techniques needs to be adjusted for surplus assets or unrecorded liabilities and other factors that are not covered by a valuation technique. See AFIC/ BVCA/ EVCA (2004), p. 9. In effect, the enterprise value is a theoretical takeover price, i.e., in the event of a buyout an acquirer would have to take on the company’s debt but would pocket its cash.Google Scholar
  205. 800.
    See AFIC/ BVCA/ EVCA (2004), p. 19. Pratt/Reilly/Schweihs estimate the marketability discount for privately held companies to be in a range of 25% to 30%. See Pratt/Reilly/Schweihs (2000), p. 402.Google Scholar
  206. 801.
    See Thoen (2002), p. 4.Google Scholar
  207. 802.
    See Baker/ Luff (2005), p. 4.Google Scholar
  208. 803.
    See Poole/ Spooner (2006), p. 175. Sometimes the method is called ‘price of recent investment’, ‘latest round of financing’, or simply ‘cost’.Google Scholar
  209. 805.
    It depends on the specific circumstances for how long this methodology stays appropriate for a particular investment. In practice, a period of one year is often used. See AFIC/ BVCA/ EVCA (2004), p. 15. Chapter provides more details.Google Scholar
  210. 806.
    See Poole/ Spooner (2006), p. 176. IAS 39.AG74 requires a price in an arm’s length market transaction between knowledgeable, willing parties to be representative of fair value.Google Scholar
  211. 807.
    Achleitner shows in an example of a pharmaceutical company that the price an acquirer is willing to pay heavily depends on how the targeted company fits into its strategy. See Achleitner (2002b), p. 206.Google Scholar
  212. 809.
    The list is not exclusive. See for more Tuck (2003c), p. 30; AFIC/BVCA/EVCA (2004), p. 14; Poole/Spooner (2006), p. 177; Ballwieser (2004), p. 191.Google Scholar
  213. 810.
    This method can be simply called ‘method of multiples’. See Feldman (2005), p. 45. This includes also multiples of revenues or other performance indicators, e.g. customers. According to the International Private Equity & Venture Capital Guidelines, however, these methods are subsumed under the valuation technique ‘industry valuation benchmarks’. More generally, IAS 39.AG74 refers to ‘the current fair value of another instrument that is substantially the same’.Google Scholar
  214. 811.
    See Pratt (2001), p. 4.Google Scholar
  215. 812.
    See Achleitner/ Nathusius (2004), p. 127. Enterprise multiples are sometimes also called invested capital multiples. It is critical that the calculation of the multiple for the market transaction is done on a basis that is consistent with the manner the multiple is applied to data for the target company. See Pratt (2001), p. 4.Google Scholar
  216. 813.
    See AFIC/ BVCA/ EVCA (2004), p. 16. EBITDA figures eliminate the impact of depreciation of fixed assets on valuation. However, different level of capital expenditures for fixed assets or the growth by acquisitions might affect the company’s value. Valuers should carefully take that into account.Google Scholar
  217. 814.
    See Achleitner/ Nathusius (2004), p. 123. The latter is also called recent acquisitions approach. See Böcking/Nowak (1999), p. 174.Google Scholar
  218. 815.
    See among others Pratt (2001), pp. 33 et seq. for a discussion of the different approaches.Google Scholar
  219. 816.
    See Böhler (2004b), p. 239. Ballwieser criticizes that a detailed analysis of the comparability is necessary which requires as much entity-specific data assumptions as model-based valuation techniques such as discounted cash flow analysis. See Ballwieser (2004), p. 192.Google Scholar
  220. 817.
    AFIC/ BVCA/ EVCA (2004), p. 17. Multiples need to be adjusted to reflect this. See Achleitner/ Nathusius (2004), p. 125.Google Scholar
  221. 818.
    See AFIC/ BVCA/ EVCA (2004), p. 18. Again, it is essential that the earnings used to calculate the multiple used must correlate to the earnings of the company that is to be valued.Google Scholar
  222. 820.
    See Pratt (2001), p. 4. Amir/Lev for example find that in the wireless communication industry non-financial information is of more value than traditional, financial indicators. They expect this to be the case in other science-based, high-growth sectors, too. See Amir/Lev (1996), p. 5.Google Scholar
  223. 821.
    See AFIC/ BVCA/ EVCA (2004), p. 23.Google Scholar
  224. 822.
    See Achleitner/ Nathusius (2004), p. 133 and therein cited literature for a profound discussion.Google Scholar
  225. 823.
    See Pratt/ Reilly/ Schweihs (2000), p. 45. Any off-balance sheet or contingent assets and liabilities should be included. The technique is also generally called asset-based approach. For a detailed description of the valuation procedure see Pratt/Reilly/Schweihs (2000), pp. 311 et seq.Google Scholar
  226. 824.
    See AFIC/ BVCA/ EVCA (2004), pp. 20 et seq.Google Scholar
  227. 825.
    See Böhler (2004b), p. 236. For an overview of DCF techniques in general see Copeland/Koller/ Murrin (2000) or Ballwieser (2004). For its application to closely-held companies see Pratt/Reilly/ Schweihs (2000), and with respect to the valuation of high-growth companies see Achleitner/ Nathusius (2004). Other income-based approaches can be distinguished based on the income stream that the valuer applies. Accounting earning figures that accrue to the equity holder could for example be used (discounted earnings approach). Other future income streams may be dividends, interests, security sale proceeds. See Pratt/Reilly/Schweihs (2000), p. 154.Google Scholar
  228. 826.
    This described model is the entity approach to valuation which results into the value of both equity and debt. An appropriate discount factor is therefore a weighted average cost of capital. Alternatively, one could estimate the flow to equity (equity approach) but would then need to discount the cash flow with the equity costs only. See Copeland/ Koller/ Murrin (2000), pp. 131 et seq. for the details of these different frameworks.Google Scholar
  229. 827.
    See Pratt/ Reilly/ Schweihs (2000), p. 153.Google Scholar
  230. 828.
    See AFIC/ BVCA/ EVCA (2004), p. 21.Google Scholar
  231. 830.
    See AFIC/ BVCA/ EVCA (2004), p. 21.Google Scholar
  232. 831.
    See AFIC/ BVCA/ EVCA (2004), pp. 22 et seq.Google Scholar
  233. 832.
    See Lerner/ Willinge (2005), p. 214.Google Scholar
  234. 833.
    For details on the real option approach see among others Brealey/ Myers (2005), pp. 597 et seq; Copeland/Koller/Murrin (2000), pp. 399 et seq; Dixit/Pindyck (1995); Achleitner/Nathusius (2004), pp. 67 et seq.Google Scholar
  235. 834.
    Option pricing models have been developed to value financial options. Examples are the Black-Scholes formula or the binomial method. See for details among others Brealey/ Myers (2005), pp. 565 et seq; Achleitner/Nathusius (2004), pp. 76 et seq. There are only few limited situations where option pricing can be applied to value entire companies. See Copeland/Koller/Murrin (2000), p. 399.Google Scholar
  236. 835.
    See Lerner/ Willinge (2005), p. 214.Google Scholar
  237. 837.
    In their study investigating the valuation approaches of German private equity funds, the authors find that only 7–8% of the funds use the real options approach. See Achleitner et al. (2004b), p. 702.Google Scholar
  238. 838.
    See AFIC/ BVCA/ EVCA (2004), p. 27.Google Scholar
  239. 839.
    Given the close relationship between investor and company in the investment holding period, it can be expected that the fund manager has usually close access to information. See Thoen (2002), p. 7.Google Scholar
  240. 840.
    See Pratt/ Reilly/ Schweihs (2000), p. 440. An example for a rule of thumb is the number of subscribers of a cable operator.Google Scholar
  241. 841.
    See Pratt/ Reilly/ Schweihs (2000), p. 440.Google Scholar
  242. 842.
    See Baker/ Luff (2005), p. 4.Google Scholar
  243. 843.
    See Baker/ Luff (2005), p. 4. According to the International Private Equity & Venture Capital Valuation Guidelines, discounted cash flows and industry benchmarks methods are rarely used in isolation and if, only with extreme caution. They are rather useful as a crosscheck of estimated values resulting from market-based techniques. See AFIC/BVCA/EVCA (2004), p. 14.Google Scholar
  244. 844.
    See AFIC/ BVCA/ EVCA (2004), pp. 27 et seq. Fund managers following these guidelines are expected to use the prescribed techniques unless it can be proven that another methodology provides more reliable results.Google Scholar
  245. 846.
    See AFIC/ BVCA/ EVCA (2004), p. 13.Google Scholar
  246. 847.
    This could be for example the use of market-based approaches and in addition a discounted cash flow model. See Baker/ Luff (2005), p. 4.Google Scholar
  247. 848.
    See Achleitner et al. (2004b), p. 703. The study bases on a survey among private equity funds in German speaking countries.Google Scholar
  248. 849.
    See AFIC/ BVCA/ EVCA (2004), p. 13. Alternative results could be either used as a cross-check for the result of one technique or weighted to get one final result. See Pratt/Reilly/Schweihs (2000), p. 443.Google Scholar
  249. 850.
    See Böhler (2004b), p. 240.Google Scholar
  250. 851.
    The following questions are based on AFIC/ BVCA/ EVCA (2004), pp. 31 et seq; Böhler (2004b), pp. 240 et seq; Peigg (2004c), p. 6 and are related to the list of loss events to test for impairment of a financial instrument in IAS 39.59 and IAS 39.61.Google Scholar
  251. 852.
    Own exhibit based on AFIC/ BVCA/ EVCA (2004), pp. 31 et seq; Böhler (2004b), pp. 240 et seq; Peigg (2004c), p. 6.Google Scholar
  252. 853.
    With respect to IFRS impairment requirements, there is a degree of circularity in the definition of impairment for those equity investments whose fair value cannot be reliably measured. They should be carried at cost unless the assets are impaired (IAS 39.46c). But no guidance is given how to estimate the impairment amount. See Bane (2005), p. 5.Google Scholar
  253. 854.
    See Böhler (2004b), p. 242. He applies his model to quantify the effect of any deterioration.Google Scholar
  254. 855.
    The International Private Equity & Valuation Capital Valuation Guidelines suggests tranches of 25 percent unless the valuer has information to more accurately assess fair value in tranches of 5 percent. See AFIC/ BVCA/ EVCA (2004), p. 32.Google Scholar
  255. 856.
    In a study by Tuck among U.S. private equity funds, 59% of the venture capital fund managers who have not adopted the Peigg guidelines cites as their primary reason for not implementing them that they prefer write-ups only if a new round of financing has occurred. See Tuck (2005), p. 10.Google Scholar
  256. 857.
    See AFIC/ BVCA/ EVCA (2004), p. 32. In a guidance letter on the criticized paragraph 30 which deals with non-financing valuation increases, Peigg makes clear that for seed and early stage companies such a write-up would be unlikely within the first two years. Furthermore, in isolation examples like ‘the build out of a management team’ or ‘the acquisition of a key customer’ should not lead to a write-up. In addition, increases should be reviewed by the advisory board or a valuation policy committee. See Peigg (2004d).Google Scholar
  257. 858.
    See for an overview of deal structuring among others Lerner/ Hardymon (2005); Tuck (2003b).Google Scholar
  258. 859.
    Typically the rights are attached to preferred stock. See Pratt/ Reilly/ Schweihs (2000), p. 534.Google Scholar
  259. 860.
    See AFIC/ BVCA/ EVCA (2004), p. 11. The valuer should consider any surplus cash arising in the underlying portfolio company through the exercise of options.Google Scholar
  260. 861.
    See Woronoff/ Rosen (2005), p. 8. In the U.S. market liquidation preferences are used in 98% of venture capital financing rounds. See Kaplan/Strömberg (2003), p. 290. The use of these rights is also standard in German financing transactions. See Hoffmann/Hölzle (2003), p. 113.Google Scholar
  261. 862.
    See Woronoff/ Rosen (2005), p. 7. The definition of ‘liquidation’ is negotiated between the parties involved.Google Scholar
  262. 863.
    See Fingerle (2005), p. 127. This can be linked with cumulative dividends. Furthermore, even multiple liquidation preferences have been negotiated where the investor asks for the repayment of double or triple of his investment.Google Scholar
  263. 864.
    This is suggested by both the International Private Equity & Venture Capital Valuation Guidelines and Peigg Valuation Guidelines. See AFIC/ BVCA/ EVCA (2004), p. 33 and Peigg (2004c), p. 11.Google Scholar
  264. 865.
    See Fingerle (2005), p. 128. Participation features are very common for U.S. venture capital deals. See Blaydon/Wainwright (2006), p. 41.Google Scholar
  265. 866.
    Based on Blaydon/ Wainwright (2006), p. 42.Google Scholar
  266. 867.
    Private equity investors typically protect their investments against share and price dilution provisions. Share dilution provisions protect the ownership of an investor against dilution in events where new shares are issued. Primarily, private equity investors are concerned with down-rounds which are financing rounds that value a company’s stock at lower price per share than previous rounds. So called price dilution provisions protect the holders’ shares from sales of shares at lower valuations in down-rounds. See Fingerle (2005), pp. 128 et seq; Tuck (2003b), p. 8; Harris (2002), p. 35.Google Scholar
  267. 868.
    Ratchet clauses are used in venture capital contracts to incentivize the management team. In case the management team does not meet a performance target, a ratchet-down agreement specifies that the management’s equity share will be reduced by transferring shares from management to the private equity investors. A ratchet-up agreement conversely sorts out that if management meets its target on time, it will receive shares from the investor. See Fingerle (2005), p. 123.Google Scholar
  268. 869.
    See AFIC/ BVCA/ EVCA (2004), p. 33. For an overview of contractual rights that are typically used in venture capital financing relationships see Fingerle (2005), pp. 103 et seq.Google Scholar
  269. 870.
    See Michas (1997), p. 1.Google Scholar
  270. 871.
    See Kaserer/ Wagner/ Achleitner (2003), p. 262.Google Scholar
  271. 873.
    See Kaneyuki (2003), p. 508. The author also points out that funds might use new investments rounds not conducted at arm’s length by independent third party investors as indication for an increase in value. This is not allowed by the international valuation guidelines which are assumed to be applied in this analysis.Google Scholar
  272. 874.
    Kaneyuki calls this creative valuation. See Kaneyuki (2003).Google Scholar
  273. 875.
    See Kaneyuki (2003), p. 507; Gompers/Lerner (2000), p. 251.Google Scholar
  274. 876.
    See Cumming/ Walz (2004), p. 9. They provide evidence that younger funds overstate their valuations.Google Scholar
  275. 877.
    See Kaneyuki (2003), p. 507.Google Scholar
  276. 879.
    See Lerner/ Hardymon/ Leamon (2005), p. 417.Google Scholar
  277. 880.
    See Tuck (2003c), p. 7; Lerner/Hardymon/Leamon (2005), p. 417.Google Scholar
  278. 881.
    See Michas (1997), p. 5. The larger the number of investors in a fund, the higher the likelihood that information could be passed to third parties.Google Scholar
  279. 882.
    See Michas (1997), p. 5.Google Scholar
  280. 883.
    See Böhler (2004b), p. 125. During the first years of a fund cycle, the so-called investment period, the management fee is usually a percentage of the committed capital. After that, however, it might be tied to the remaining net asset value.Google Scholar
  281. 884.
    See Lerner/ Hardymon/ Leamon (2005), p. 414.Google Scholar
  282. 885.
    See Martin/ Rich/ Wilks (2006), p. 295.Google Scholar
  283. 886.
    See Lerner/ Hardymon/ Leamon (2005), p. 414.Google Scholar
  284. 887.
    See Griffin/ Varey (1996), p. 228.Google Scholar
  285. 888.
    See Zacharakis/ Shepherd (2001), p. 313; Müller (2003), p. 129. Müller provides an overview of behavioral finance aspects in the valuation process of young companies.Google Scholar
  286. 890.
    See Cumming/ Walz (2004). They base their analysis on a dataset collected by the Center for Private Equity Research (CEPRES) consisting of 221 funds, 72 management companies and 5040 entrepreneurial firms.Google Scholar
  287. 891.
    See Cumming/ Walz (2004), p. 21.Google Scholar
  288. 892.
    See Cumming/ Walz (2004), p. 22.Google Scholar
  289. 893.
    See for example the definition in the IFRS Framework, para. 99; Ernst & Young (2004), p. 121.Google Scholar
  290. 894.
    See Ick (2005), p. 18; Böhler (2004b), p. 221; Tyebjee/Bruno (1984), p. 1052.Google Scholar
  291. 895.
    See Gompers (1995), p.1463; Tyebjee/Bruno (1984), p. 1051; Black (2003), p. 48.Google Scholar
  292. 896.
    See Meyer/ Mathonet (2005), p. 43.Google Scholar
  293. 897.
    See Meyer/ Mathonet (2005), p. 43; Achleitner/Nathusius (2004), p. 5; Michas (1997), p. 4. Intellectual property rights are patents, copyrights, trademarks, design rights or certain specialist rights. See Artley et al. (2003), p. 247. For the challenges of valuing intangible assets see Achleitner/Nathusius/Schraml (2007).Google Scholar
  294. 898.
    See Meyer/ Mathonet (2005), p. 43. Fingerle provides a valuable classification of risks in high growth companies. See Fingerle (2005), pp. 44 et. seq.Google Scholar
  295. 899.
    See Achleitner et al. (2004b), p. 702.Google Scholar
  296. 900.
    This may be, however, different for turnaround investments. See Kraft (2001).Google Scholar
  297. 901.
    See Black (2003), p. 48.Google Scholar
  298. 902.
    See Blaydon/ Wainwright (2004a), p. 45.Google Scholar
  299. 903.
    See Tuck (2003c), p. 7.Google Scholar
  300. 904.
    See Snow (2004), p. 44; Harrell/Spiegel (2004), p. 20.Google Scholar
  301. 905.
    See Harrell/ Spiegel (2004), p. 20.Google Scholar
  302. 906.
    The maximization of the portfolio company value is the aim of the private equity investors and is therefore typically integrated in internal management systems. See for example Achleitner et al. (2004a), p. 37; Schenk (2004), p. 155.Google Scholar
  303. 907.
    See Harrell/ Spiegel (2004), p. 17.Google Scholar
  304. 909.
    See Harrell/ Spiegel (2004), p. 17. For the secondary market see chapter 3.7.3.Google Scholar
  305. 910.
    See Snow (2006), p. 30.Google Scholar
  306. 912.
    See EVCA (2006b); PEIGG (2005); CFA Institute (2005); BVCA (2003).Google Scholar
  307. 913.
    See Wallace/ Naser (1995), p. 326; Marston/ Shrives (1991), p. 197. According to Cooke/Wallace, disclosure “does not possess inherent characteristics by which one can determine its intensity or quality like the capacity of a car.” Cooke/Wallace (1989), p. 51.Google Scholar
  308. 914.
    See Marston/ Shrives (1991), p. 195.Google Scholar
  309. 915.
    See Prencipe (2004), p. 328.Google Scholar
  310. 916.
    See Bukh et al. (2005), p. 719.Google Scholar
  311. 917.
    The validity has been proved by consistent and corroborative results documented by previous studies on the determinants of disclosure. See Ahmed/ Courtis (1999) for a summary.Google Scholar
  312. 918.
    For a review of accounting studies that employ disclosure indices see Ball/ Foster (1982); Marston/Shrives (1991); Ahmed/Courtis (1999). The disclosure index has been first applied to quantify the extent of disclosure in annual reports in general. See for example Cerf (1961); Buzby (1975), Singhvi/Desai (1971). Recently, more specific types of information have been analyzed, e.g. segment information, information on intellectual capital, social and environmental disclosures. See for example Prencipe (2004); Bukh et al. (2005).Google Scholar
  313. 919.
    See Marston/ Shrives (1991), p. 201.Google Scholar
  314. 920.
    See Marston/ Shrives (1991), p. 201. It is, however, questionable whether consensus within the user group is established.Google Scholar
  315. 921.
    This corresponds with processes that researchers use who develop disclosure indices for public companies. See for example Cooke (1989a), pp. 181 et seq; Prencipe (2004), p. 329. The challenge here is, however, that nobody before has developed an index for private equity fund reports.Google Scholar
  316. 922.
    Healy/Palepu provide a review of empirical disclosure literature. See Healy/ Palepu (2001). Reviews of studies of the level and determinants of disclosure are provided for example by Ahmed/Courtis (1999); Marston/Shrives (1991).Google Scholar
  317. 923.
    See Böhler (2004b); PwC (2003).Google Scholar
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    See PwC (2003), p. 6.Google Scholar
  319. 925.
    See PEIGG (2004a).Google Scholar
  320. 926.
    It is explicitly stated that the results are not scientific but are intended to provide PEIGG with an understanding of the views of various industry participants. See PEIGG (2004a), p. 3.Google Scholar
  321. 927.
    See PEIGG (2004a), p. 6.Google Scholar
  322. 928.
    See for example Libby (1981), pp. 40 et seq.Google Scholar
  323. 929.
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  324. 930.
    See Kemmerer/ Weidig (2005), p. 87.Google Scholar
  325. 931.
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  326. 932.
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  327. 933.
    See Hielscher/ Zelger/ Beyer (2003); Haarmann Hemmelrath/Universitaet Leipzig (2002).Google Scholar
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    See Haarmann Hemmelrath/ Universitaet Leipzig (2002), pp. 13 et seq.Google Scholar
  329. 935.
    See Robbie/ Wright/ Chiplin (1997), pp. 19 et seq.Google Scholar
  330. 936.
    See Tuck (2004b), p. 15.Google Scholar
  331. 937.
    See Thoen (2002), p. 19.Google Scholar
  332. 938.
    See PEIGG (2005), pp. 3 et seq.Google Scholar
  333. 939.
    For an overview of the old reporting guidelines see for example Hagenmüller (2004), pp. 167 et seq; Thoen (2002), pp. 22 et seq.Google Scholar
  334. 940.
    This was necessary in order to adopt the reporting guidelines to the new International Private Equity & Venture Capital Valuation Guidelines that have been endorsed in March 2005, and to reflect the evolution of reporting practices within the industry. See EVCA (2006b), p. 3. Most of the changes are due to the change to fair valuation practice. See Witney (2006).Google Scholar
  335. 941.
    See EVCA (2006b), p. 3.Google Scholar
  336. 942.
    See BVCA (2003), p. 3. EVCA's old level one provision specified a minimum reporting standard. See Hagenmüller (2004), p. 168.Google Scholar
  337. 943.
    See PEIGG (2005). The NVCA has not issued any reporting guidelines.Google Scholar
  338. 944.
    See PEIGG (2004b).Google Scholar
  339. 945.
    See Snow (2005), p. 24. For more details about the FOIA see chapter 3.8.4.Google Scholar
  340. 946.
    See PEIGG (2005), p. 18; Snow (2005), p. 25.Google Scholar
  341. 947.
    See CFA Institute (2005), pp. 18 et seq. The revised GIPS standards that include the private equity provisions are effective from January 1, 2006. See Sormani (2005), p. 12. CFA Institute also provides interpretive guidance on applying GIPS to private equity investments. See CFA Institute (2006).Google Scholar
  342. 948.
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  343. 950.
    See Hagenmüller (2004), p. 173. International private equity fund investors do not prefer national standards. See Hielscher/Zelger/Beyer (2003), p. 505.Google Scholar
  344. 951.
    The following summary and analysis of information items that could be included in funds’ reporting does not mention anything about the actual presenting and the layout of reports. For an adequate template of how to present information in reports see the examples in EVCA or PEIGG reporting guidelines. See EVCA (2006b), pp. 13 et seq; PEIGG (2005), pp. 10 et seq.Google Scholar
  345. 952.
    For an example see EVCA (2006b), p. 17.Google Scholar
  346. 953.
    See Böhler (2004b), p. 273.Google Scholar
  347. 954.
    See Hagenmüller (2004), p. 168.Google Scholar
  348. 955.
    See EVCA (2006b), p. 11; PEIGG (2005), p. 8.Google Scholar
  349. 956.
    See for example Bungartz (2003) for a study among German public companies.Google Scholar
  350. 957.
    Only few general partners even measure the risks inherent in investments. Some do so by calculating loss ratios or applying scoring models. See Hielscher/ Zelger/ Beyer (2003), p. 503.Google Scholar
  351. 958.
    See EVCA (2006b), p. 6. PEIGG reporting guidelines do not address risk reporting at all.Google Scholar
  352. 959.
    See Böhler (2004b), p. 275.Google Scholar
  353. 961.
    See Böhler (2004b), p. 272.Google Scholar
  354. 962.
    See Mawson (2005), p. 18 for details. These fees can be significant. Blackstone, for example, is said to have charged more than $100m of transaction and monitoring fees in less than a year when it floated Celanese, a German chemicals company in 2005.Google Scholar
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  356. 964.
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  357. 966.
    For an overview see for example Ding et al. (2005) or Ahmed/Courtis (1999).Google Scholar
  358. 967.
    This relates to the question whether the type of industry has an influence on the level of disclosure. It has been confirmed for public reports by Adrem (1999), Cooke (1989b) or Cooke (1991) who find differences in the extent of disclosure for Swedish and Japanese companies depending on the industry type.Google Scholar
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    See Achleitner/ Bassen (2004), p. 161.Google Scholar
  361. 970.
    Archambault/ Archambault (2003) demonstrate that disclosure is influenced by social factors such as cultural, political, economic, and corporate ones. Jaggi/Low (2000) find that the legal system of a country plays an important role in financial disclosures.Google Scholar
  362. 971.
    The Asian private equity market is growing considerably. See Grabenwarter/ Weidig (2005a), p. 15. However, the market is not yet as developed as in Europe or the U.S.Google Scholar
  363. 972.
    See Gompers (1994), pp. 5 et seq.Google Scholar
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    See among others Cooke (1989a), p. 120 and Ahmed/Courtis (1999), p. 37 and therein cited studies.Google Scholar
  365. 975.
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  366. 976.
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  367. 978.
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  368. 979.
    Disclosure quality is difficult to assess. Therefore, researchers tend to assume quantity and quality are positively related. See Botosan (1997), p. 324.Google Scholar
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    See Cooke (1991), p. 179.Google Scholar
  370. 981.
    See Ahmed/ Courtis (1999), p. 36.Google Scholar
  371. 982.
    See Chow/ Wong-Boren (1987), p. 536; Wallace/Naser (1995), p. 331; Ball/Foster (1982), p. 201. Several studies use questionnaires to ask financial analysts about their perceived importance of selected items. See for example Buzby (1974); Prencipe (2004).Google Scholar
  372. 983.
    See Cooke (1989b), p. 182.Google Scholar
  373. 984.
    See Ahmed/ Courtis (1999), p. 36. Empirical evidence has also demonstrated that using weighted or unweighted indexes produces equivalent results and therefore might be interchangeable. See Chow/Wong-Boren (1987), pp. 536 et seq; Prencipe (2004), p. 333.Google Scholar
  374. 985.
    See Marston/ Shrives (1991), p. 204; Patton/Zelenka (1997), p. 609.Google Scholar
  375. 987.
    This approach was suggested by Cooke. He acknowledges that this introduces an element of subjectivity into the dichotomous procedure, but is appropriate to overcome the mentioned problem. See Cooke (1989a), p. 115.Google Scholar
  376. 988.
    See Bukh et al. (2005), p. 720 or for a slightly different notation Cooke (1989a), pp. 182 et seq.Google Scholar
  377. 993.
    Feinendegen/Schmidt/Wahrenburg also note that problem in their paper on limited partnership agreements. See Feinendegen/ Schmidt/ Wahrenburg (2003), p. 1174.Google Scholar
  378. 994.
    Different approaches have been considered in former research on private equity in order to assess the completeness and representativeness of data sets. Gomper/Lerner for example compare their sample of limited partnership agreements with a database compiled by Venture Economics. See Gompers/ Lerner (1996), p. 477. Feinendegen/Schmidt/Wahrenburg match the fund volume of their sample with the total new funds raised within that period. See Feinendegen/Schmidt/ Wahrenburg (2003), p. 1174. Due to the lack of data, the assessment cannot be done in this case.Google Scholar
  379. 995.
    For details on the Mann-Whitney U test see for example Bortz (1999), pp. 146 et seq. The tests in this analysis are performed with SPSS.Google Scholar
  380. 996.
    The data in this study satisfies the three assumptions underlying the Mann-Whitney U test: (i) the two samples are random, (ii) the two samples are independent, and (iii) the scale of measurement is at least ordinal. See for example Eckstein (2000), p. 162; Janssen/Laatz (2003), p. 497.Google Scholar
  381. 998.
    See Hagenmüller (2004), p. 174; Haarmann Hemmelrath/Universitaet Leipzig (2002), p. 17.Google Scholar
  382. 999.
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  383. 1001.
    See Böhler (2004b), p. 275.Google Scholar
  384. 1002.
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  385. 1003.
    See Hagenmüller (2004), p. 50.Google Scholar
  386. 1004.
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  388. 1006.
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  389. 1007.
    See Hagenmüller (2004), p. 50.Google Scholar
  390. 1008.
    See Hielscher/ Zelger/ Beyer (2003), p. 504. According to their results, especially smaller funds forgo to report on fees.Google Scholar
  391. 1009.
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  392. 1010.
    See Gove (2005), p. 47.Google Scholar
  393. 1011.
    See Private Equity Intelligence (2005), p. 3.Google Scholar
  394. 1012.
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  395. 1013.
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  397. 1015.
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  398. 1016.
    These findings have been also supported by Böller. See Böhler (2004b), p. 177.Google Scholar
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    See Meyer/ Mathonet (2005), p. 280.Google Scholar
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    See Böhler (2004b), p. 296.Google Scholar
  404. 1024.
    See EVCA (2006b), pp. 13 et seq. The EVCA Reporting Guidelines and the PEIGG Reporting and Performance Measurement Guidelines, for example, provide a template for the fund reporting. See PEIGG (2005), pp. 10 et seq. Böhler also offers a structure for the reporting content of private equity funds. See Böhler (2004b), p. 283.Google Scholar

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