AIF Industry Backs Adoption of IPEV Guidelines for Valuations
Summary The AIF sector backs SEBI's proposal to update valuation norms to address industry concerns and streamline regulations. SEBI's proposal, open for feedback until June 13, suggests AIFs follow industry association guidelines for valuing unlisted securities. Adoption of the IPEV Guidelines is preferred by the AIF industry due to their frequent investments in startups. Experts emphasise the importance of these changes in rectifying valuation disparities, with Natasha Treasurywala highlighting the need for a customised valuation approach, particularly for startup investments.
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Jun 5, 2024
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The AIF sector has embraced recent suggestions by SEBI to amend valuation norms, responding to calls from industry representatives to address valuation issues and ease regulations. SEBI's proposal, introduced on May 23, suggests that the valuation of unlisted securities held by AIFs adhere to guidelines set by eligible industry associations rather than Mutual Fund Regulations. This proposal is open for public feedback until June 13. The AIF industry association has supported the International Private Equity and Venture Capital Valuation Guidelines (IPEV Guidelines) for this proposed adjustment. With AIFs often investing in startups and early-stage private companies, experts argue that this change is necessary to rectify valuation discrepancies related to fund holding duration, fund structure, and investment valuation frequency.
An unnamed member of the AIF industry praised the recent changes in valuation norms, stating that they address existing issues and uncertainties. They highlighted that the new guidelines would remove ambiguities surrounding specific regulations. AIF industry representatives emphasised the necessity for a valuation approach for private investments based on cash flows aligned with the underwriting thesis, a factor not covered by MF guidelines. They also noted a fundamental distinction between MF and AIF investments lies in their holding period strategy, with MFs typically holding investments as 'available for sale'. In contrast, AIFs usually hold investments as 'hold till maturity'.
Natasha Treasurywala, a partner at Desai & Diwanji, highlighted the unique nature of AIF investments in startups and private firms, where considerations like projections and forecasts are pivotal for valuation. She expressed optimism that if these changes are implemented, they would offer a more tailored valuation approach for AIFs.
AIFs engage in various company life cycle stages, including the seed stage, 'asset-light' stage, growth stage, and exit stage, sometimes venturing into unconventional sectors lacking tangible assets. The IPEV guidelines present methodologies like discounted cash flow and internal rate of return, providing flexibility to select a method based on the assessment of investee companies' business models. Nonetheless, valuation for securities other than unlisted, non-traded, thinly traded, and below investment-grade ones will still adhere to MF regulations.
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