The increasing focus on valuation oversight for AIFMs
This event was attended by highly experienced risk managers and valuation officers from AIFM’s and infrastructure funds, together with EY experts. The discussions around valuation oversight are broad but revealed some interesting key considerations. Participants recognized that valuation oversight has become increasingly important for AIFMs in recent years, not only to comply with the regulatory requirements, but also to increase efficiency and effectiveness. This is done by further enhancing technical tools and operating models in the context of ongoing oversight procedures. Increased scrutiny by regulators and shareholders, greater market volatility and high levels of uncertainty resulting from Covid-19 pandemic have also contributed to an increased complexity faced by professionals in charge of valuation oversight. In order to cope with complexities and manage available resources effectively, AIFMs are increasingly considering solutions to externalize specific valuation oversight tasks together with other benefits
There is a great emphasis on an efficient organization and digitalization of the valuation function and oversight. The key aspects of digitalization in valuation and valuation oversight process include but are not limited to, the documentation of the valuation oversight, improving technological tools to build cash flow projections and perform valuations and advancing platforms to improve communication of information between all stakeholders.
In relation to Covid-19, there is also an increase in supervisors’ and auditors’ attention and required supporting documentation, which further increases the importance of valuation oversight. In comparison to previous years, there is now more scrutiny into the details of valuation, and more challenges to the parties responsible for oversight. In practice, we often see models developed when the assets are first acquired and evolved through the life of the assets. This would evidently increase the importance of maintenance reviews. Considering the associated costs of regular model reviews, it is more practical to perform such maintenance reviews when there are trigger points in place that justify the necessity of a model review. As a result of this, EY has developed a risk-based approach that enables an active monitoring of model review requirement, to efficiently manage the number of independent model reviews.
AIFMs are increasingly considering solutions to support the complexities of the valuation oversight tasks. An efficient valuation oversight supported by the appropriate technology and expert skills enable AIFMs to sustainably grow and navigate the complex environment of portfolio valuations. Externalizing specific valuation oversight tasks could further enable AIFMs to deal with these complexities successfully and may help them manage their internal resources more efficiently. Managing valuation oversight duties in an efficient and compliant manner will allow AIFMs to free up their valuable management resources to further sustain their strategic business agenda.
Christophe Vandendorpe and Eltun Movsumov, EY Luxembourg