ALTLOOK: The Alternative Investments Podcast

In our first episode of ALTLOOK: The Alternative Investments Podcast, David Larsen focuses on what is meant by fair value and why it is such an important measurement basis for alternative investments. Investors need (though they may not always want) rigorous, reliable and transparent fair value estimates of underlying private investments at least quarterly and increasingly more often. What is fair value, and why is it important?

David Larsen is a managing director in the Alternative Asset Advisory practice, based in Seattle, Washington and a Kroll Institute Fellow. He has more than 37 years of transaction and accounting experience. He specializes in fair value accounting, specifically for valuation, accounting and regulatory issues faced by alternative asset managers and investors.

Passages from the episode

“What do we mean when we say alternative assets or alternative investments? that term can mean different things to different people. When we say alternative assets, we're focused on investments in private or illiquid debt and equity instruments, either directly or through investment funds. Buyout, or late stage investing, venture capital, early stage investments, hedge funds, which could be a combination of debt investments, private debt, liquid debt, private securities, liquid or publicly traded securities, credit funds, again, would be focused on debt investments, real estate, infrastructure, and funds of funds actually investing in a group of funds of these types that I've just described.”

“In these times of a global pandemic with maybe no end in sight and significant market uncertainty, or at least volatility, with public markets that are at trading near or at all time highs, some of us are reminded of a decade or more ago in the financial crisis of 2008 and 2009. At that time, “fair value” was actually vilified by some as a contributing cause to the great financial crisis. Well, I find that view of fair value contributing to the financial crisis as highly flawed.  Some would've said that fair value meant fire sale pricing. Well, the truth can't be further from that perspective. Fair value rules as promulgated by the accounting standards, FASB, the financial accounting standards board and IASB, the international accounting standards board, actually prohibit the use of fire sale pricing.  If we hide the fair value of an investment, it impacts the ability for an investor to exercise good governance. … And the fact that we DID report fair value during the financial crisis gave greater transparency to what was happening with investments during that very volatile time.”

“In 2006, FASB re-looked at and came up with a new definition of fair value. That new definition of fair value is really adopted now around the world by global accounting standard setters, and in many countries with their own local regulations. And that definition of fair value is, fair value means the price that would be received to sell an asset or paid to transfer a liability. But in the context of alternative assets, it's the price that would be received to sell an asset in an orderly transaction between market participants, as of the measurement date.”

“The alternative asset space has been for 80 + years, a fair value world. We've become much more rigorous. We are working to be more reliable in exercising the judgements required to come to fair value. And by using a fair value basis, we can better compare different investments. We can make better decisions as investors and managers work together to create returns that are enhanced for, again, the needs of those investors.”