David Larsen is a managing director in the Alternative Asset Advisory practice, based in Seattle. David 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.
Ross Hostetter is a managing director in the Alternative Asset Advisory practice and Portfolio Valuation leader, North America. Ross has more than 25 years of experience serving clients across the financial services industry. He works primarily with private equity funds, hedge funds and business development companies.
Passages from the episode
“Private investment funds, venture capital funds, private equity hedge fund and the like have long been investment vehicles for sophisticated institutional investors and high-net-worth or accredited investors. And it's often said that when there's more risk, there's potentially greater return. Private equity investments, because of their illiquidity, because of their private nature, have always been deemed to be more risky, but they have often found their way into defined benefit plans, whether that be pension plans of government entities, public pension plans or corporate pension plans with defined benefit plans. However, we haven't seen private investments or private investment funds as options in self-directed plans, such as 401(k)s or even IRAs, partly because of their illiquidity, partly because again of that riskiness.” – David Larsen
“What we're seeing now is, we'll get into in the discussion, is new structures that enable investors to have liquidity, in an otherwise illiquid product that helps overcome some of the burdens or hurdles that we would've thought about as an impediment to making this asset class available to the individual investor.” – Ross Hostetter
“I see it as similar to any other investment choice that you would make, whether it's public or private investment, there's a period of gaining comfort with the asset class and a period of training and education that applies both to investment advisors and to investors alike.” – Ross Hostetter
“I think the most important thing to understand when you're an investor is, what is it that you are investing in? Are you investing at the fund level, are you investing in the manager or you investing in an underlying company or security? But when you get into the specific question around, how do you value an interest in a fund? Again, the guidance is there both through the FASB and the AICPA, which basically allows you to value that position based on the reported net asset value as of the quarter end date. And so, there's certain adjustments that you might make to bring it to a current date or ”in-phase,” as we would describe it, but ultimately, you're taking your pro rata share of the net asset value of that particular fund. And that's the way that that security gets valued.” – Ross Hostetter
“There are several different reasons why these structures haven't found their way to be used widely, but one of those is the overall fee structure—investors need to make sure that the fees make sense.” – David Larsen
“So, you're thinking about one or two positions, but it could be 50, a 100, maybe a 1,000 positions. So, how do you manage that, literally on a daily basis? And so, I think it requires having the right support in place, the right procedures in place, the right technology in place, in order to get that done. And it comes down to even the most basic things in terms of sharing of information. So, how quickly does that information get percolated up to the people that are making decisions on how that's going to impact valuation?” – Ross Hostetter
“As we get into that, I do want to highlight the point when you are thinking about putting a process in place to deal with the market and to deal with changes in the underlying performance of a position. In these interim periods, a 100,000-foot view of the world doesn't really work. I don't think it's appropriate in the fair value context of what you're required to do, meaning you couldn't just look at this and say, "Hey, we have a hundred direct and private equity type positions." And so, the S&P 500 moved 2% last week. So, we're going to move the whole portfolio up 2%. You need to layer in an investment-specific view as well, deal by deal, and come up with a methodology for changing that valuation over time.” – Ross Hostetter