Among the various conflicts of interest that arise in the private fund management business, valuation of portfolio assets may be first among equals. The specific conflict is this: portfolio managers often play a fundamental role in the valuation of portfolio assets, while at the same time, the compensation of portfolio managers is often tied directly to the performance of the fund that owns those assets. In many cases, however, given the intimacy with which the portfolio manager knows the asset, the portfolio manager is in the best position to provide relevant information on how to accurately value it. Therefore, excluding the portfolio manager from the valuation process is not a plausible solution. Against this backdrop, the use of a valuation committee has become a best practice to not only mitigate this conflict of interest but also to ensure that the manager arrives at accurate valuations. This article
considers key questions that all private fund managers confront when establishing and operating valuation committees, including: What is the role of a valuation committee? Who should be on it? What functions should it perform? How often should it meet? For more on valuation, see “Investor Suit Against Hedge Fund Manager Illustrates the Perils of Valuing Illiquid Securities
” (Oct. 8, 2015); and “DLA Piper Hedge Fund Valuation Webinar Covers Fair Value Methodologies, Valuation Services, Valuing Illiquid Positions and Handling Valuation Inquiries During SEC Examinations
” (Aug. 7, 2013).