Pricing and valuation is an inherently complex process. Funds are pricing hundreds, sometimes thousands, of instruments in dozens of portfolios, using inputs from multiple market data vendors and broker quotes. These are typically categorized as listed, over-the-counter (OTC) and private securities. Since most funds have a relatively small team devoted to the task of calculating both daily and monthly prices, they have developed over time highly customized spreadsheets for each category of securities to make the process easier.
In other words, pricing is complicated and highly specialized for each fund, but the process is manageable with appropriate manual checks and control reviews. However, manual processes are no longer seen as acceptable for regulators, large investors and allocators. Investors who make strategic decisions based on the end-of-month NAV have no way to verify whether the fees and expenses align with the valuation policy document. In fact, a recent risk alert from the SEC’s Office of Compliance Inspections and Examinations (OCIE) highlighted risks and issues associated with this lack of transparency.
The OCIE staff observed that advisers incorrectly valued certain assets in client accounts, resulting in overbilled advisory fees. This was generally the result of valuing assets using different metrics than those specified in the client advisory agreement, such as the asset’s original cost to value an illiquid asset rather than fair market value. The OCIE also noted issues with advisers making disclosures in policy documentation that did not align with actual practices. Specifically:
The staff observed private fund advisers that did not value client assets in accordance with their valuation processes or in accordance with disclosures to clients (such as that the assets would be valued in accordance with GAAP). In some cases, the staff observed that this failure to value a private fund’s holdings in accordance with the disclosed valuation process led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings.
IVP Price Master enables funds to take the complexity out of the pricing and valuation process. Providing funds with end-to-end automation, this solution efficiently retrieves data from vendors and brokers, applies waterfall pricing rules and ensures that prices meet their respective threshold checks. Connected to all leading pricing data vendors and brokers, IVP Price Master provides a flexible and configurable pricing engine that caters to the needs of any type of pricing process.Office of Compliance Inspections and Examinations, “Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds,” Securities and Exchange Commission, June 23, 2020.