Mutual Fund Directors Forum Conversation Deloitte Fair ...

Opportunity on the Horizon:A deep dive into the results of the 2021 Deloitte Fair Valuation Pricing Survey

Mutual Fund Directors Forum Conversation

Deloitte Fair Valuation Pricing Survey,19th editionDecember 8, 2021

Paul Kraft, Lead Partner, Deloitte & Touche LLPTom Wines, Managing Director, Deloitte & Touche LLPKatie Yorra, Senior Manager, Deloitte & Touche LLP

Investment valuation and governance: Industry trends and benchmarkingCopyright © 2021 Deloitte Development LLC. All rights reserved. 2

Leading Today’s Conversation

Paul KraftLead PartnerInvestment Management Brand Excellence LeaderDeloitte & Touche LLP

Paul is a Partner in Deloitte’s Financial Services Industries practice, Investment Management Brand Excellence Leader and has over 30 years of experience providing audit and related services to some of Deloitte’s largest asset management, insurance and banking and securities clients.

His previous firm roles have included U.S. mutual fund & investment adviser practice leader, partner in charge of the financial services industry practice for New England and deputy partner of the National Asset Management Practice. Paul has led Deloitte’s annual Fair Valuation Survey since inception and is a frequent speaker and writer on the topic of fair valuation as well as other financial services issues.

Before joining Deloitte & Touche, Paul spent over two years as assistant chief accountant in the SEC’s Division of Investment Management in Washington, D.C.

Tom WinesManaging DirectorDeloitte & Touche LLP

Tom is a Managing Director in the New England Financial Services Industry Practice and has more than 17 years of experience. He has specialized in the financial services industry throughout his career, with a primary focus on investment management clients. His expertise includes valuation of investments within mutual funds. This is Tom’s fifth year assisting on the Fair Valuation Survey.

Before joining Deloitte, Tom spent six years within the investment management industry at a Boston area fund administrator.

Katie YorraSenior ManagerDeloitte & Touche LLP

Katie is an Audit & Assurance Senior Manager in the Financial Services Industry practice. During her 13 years with the firm, Katie has served in roles with progressively increasing responsibilities on audit engagements of mutual funds and collective investment trusts.

Katie is a member of the Deloitte New England Growth Council, which builds community and client relationships, develops professionals’ leadership skills and recognizes success throughout the New England practice. She also has previously served as an investment management industry fellow, working with partner champions on technical issues and research.

Opportunity on the Horizon: A deep dive into the results of the 2021 Deloitte Fair Valuation Pricing SurveyCopyright © 2021 Deloitte Development LLC. All rights reserved. 3

Today’s Conversation

Today’s Agenda:

Deloitte Survey 19th edition overview – Opportunity on the Horizon

SEC valuation rule 2a-5 – Status & Action Steps

Board oversight trends

Technology advancements and solution

Foreign equity valuation update

Fixed income pricing

Derivative contract pricing

Illiquid investments

Other fair valuation survey key observations

Looking ahead – What is on the horizon?


Survey participants metrics

Less than 1524%

15 to 2513%

26 to 5014%

51 to 756%

76 to 1009%

Greater than 10034%

Number of registered investment companies in the fund complex Total assets under management in the fund complex

Less than $10 billion13%

$10 billion to $50 billion

30%

$51 billion to $100 billion

19%

$100 billion to $500 billion24%

Greater than $500 billion

14%

94 fund groups participated in this year’s survey. The survey was conducted in the summer of 2021 with results published on September 27, 2021


Purpose and Valuation Proposition:•Determine how survey practices, policies, and procedures compare to other fund groups in the industry• Identify emerging trends within the industry

2021 Fair Value Survey Focus Areas:•Valuation governance•Risk assessment•General policies and procedures•Roles and responsibilities•Pricing sources• Interactions with pricing vendors•Specific fair value considerations by asset type•Foreign currency exchange rates•ASC 820 considerations•SEC examinations•SEC valuation rule ***

Survey overview and structure


Deloitte Survey 19th edition overviewOpportunity on the Horizon

Valuation Risk Framework

Valuation Dashboards and Reports

ACTIVE Board Portfolio Oversight


SEC valuation rule 2a-5 – Status & Actions

Valuation Risk

Framework

Valuation Dashboards and Reports

ACTIVE Board Portfolio Oversight


Evaluating the Impact of Rule 2a-5 – Status & Actions Navigate the compliance requirements with the SEC rule 2a-5 rule

End to end valuation process

assessment and

enhancement

Price Validation and

Exception Management

Develop / Enhance

Valuation Risk Framework and Board Oversight

Pricing Vendor Due Diligence

Multi Vendor price back

testing SEC rule 2a-5

Compliance

• Valuation policies, procedures and valuation methodology• Valuation Risk Management Framework• Valuation process workflows, dependencies, handoffs, etc.• Exception management process• Valuation methodology testing methods• Pricing Vendor Due Diligence framework• Unobservable inputs and valuation models used

• Criteria, metrics and process for managing valuation exceptions

• Day over day price movement breaks based on predefined asset class specific thresholds

• Assess, attribute and validate security price movements.

• Centralized vendor challenges• Price Validation of illiquid and hard to value

assets

• Company and operating model overview• Team structure and experience• Policies, Procedures, Valuation Platform and

Methodology• Audit, Compliance and Regulatory

Considerations• Business Continuity and IT Systems

• Facility based centralized service• Broad Based Industry participation and

trade contribution• Consolidated public and private transaction

universe• Compare calibrated trade prices to EOD

vendor published prices • Measure the difference to the back testing

thresholds• Exception reports and cross vendor asset

class-based comparison reports • Portfolio Breakdown into risk categories• Results of Multivendor Price Back testing• Valuation Threshold breaches, resolution and pricing

challenges• Stale Inventory & Unpriced Inventory• Material Valuation Events• Pricing Trend Analysis• Valuation Methodology and Process Changes


• 66% have already reassessed current valuation practices to assess whether any gaps exist between current practices and what is required under Rule 2a-5.

−84% among larger fund groups with AUM of more than $100 billion.

−Less than 50% of FV survey participants with AUM of less than $10 billion have performed a gap assessment to date.

Evaluating the Impact of Rule 2a-5

Gaps in Current Practice Percentage identifying gap

Board reporting 69%

Risk assessment procedures 67%

Periodic testing procedures 45%

Evaluation of fair value methodologies 40%

Assessment of third-party pricing providers 33%

Recordkeeping 33%


•Current board reporting meshes well with requirements in some areas but not in others

Required element Percentage indicating current report discusses element

Testing results 82%

Material changes to or material deviations from approved methodologies 72%

Pricing services 61%

Material valuation risks 28%

Valuation resources 14%

Evaluating the Impact of Rule 2a-5 (continued)


•Risks identified by fund groups

−70% of FV survey participants describe the risks they have identified as “a few high-level risks,” made up of five or fewer valuation risks.

−33% have described their valuation risks in writing

−5% responded that they have identified additional risks beyond those identified by the SEC

•68% of FV survey participants do not currently have documentation in place that identifies key inputs and assumptions specific to each asset class or portfolio holding.

•Conflicts of interest identified by fund groups

−36% stated that conflicts of interest are orally discussed

−20% indicated they have not specifically identified conflicts of interest relating to the valuation process

−32% responded that conflicts of interest are in writing, with a description of control procedures that address or mitigate those conflicts.



What steps will the valuation designee take to reasonably segregate its fair value determinations from the portfolio management of the fund?

•Many commented that the function is already segregated today. Others reported the following:

−Independent review and support for recommendations of the portfolio manager-support process for broker quotes; review of all information from third party vendors to scrutinize the prices recommended by the portfolio managers.

−Prohibit portfolio managers from being on the Pricing Committee or regularly attending those meetings.

−All fair value determinations vetted through the Valuation Council and a portfolio management cannot unilaterally make a fair value determination

−Portfolio management is consulted on valuation matters without voting rights in determining the final valuation decision.

−We will no longer have any portfolio management representatives be a voting member of the Pricing Committee.

(Responses from survey participants)Evaluating the Impact of Rule 2a-5 (continued)


What requirements do you think would create the most challenge and/or SEC risk to the current valuation process?

Percentage of FV survey participants indicating that such is a challenge or risk

Development and assessment of valuation risks and related reporting 65%

Management requirement to provide “prompt” notification of material changes to the board 38%

Board requirement to provide “active” oversight of the valuation process 35%

Board requirement to periodically review the financial resources, technology, staff, and expertise of the valuation designee 29%

Board evaluation and due diligence over pricing services and related reporting 20%

Board evaluation of fund group conflicts of interest and related reporting 19%



Board oversight trends


•19% reported that boards requested changes in summarized valuation reporting over the last year

•46% provide valuation risk dashboards for their boards, virtually unchanged from the prior year

−54% reported that dashboards are more than 2 pages with KVIs and analysis

−Less common KVIs that some boards monitor:

48%—Price challenges resulting in an increase in price vs. price challenges resulting a decrease in price (Rule 2a-5 consideration)

23%—Investments covered by only one pricing vendor

16%—Use of a secondary pricing vendor instead of the primary pricing vendor

16%—Portfolio prices with large deviations across sources for a large period of time.

FV Survey -- What is happening in board reporting?


8%

27%

21%

57%

19%

33%

90%

0% 50% 100%

Other (Please specify below)

Detialed results and information on price overrides

Detailed information on the reason why the pricing challenge was madeand the amount of market data that existed to support the pricing…

Directional/trend information on pricing challenges (i.e., to evalute anypotential management bias in the valuation process

Detailed information on the value/NAV impact of the pricing challengesand adjustments made by management

Detailed information of pricing challenges made by fund management andactions taken that impact valuation decisions

A summary of pricing challenges made by fund management

67% reported that they provide their boards with information on price challenges. What exactly are they receiving?

FV Survey -- What do boards get relative to price challenges?


•Additional data for fair-valued securities, broker quotes, single sourced securities, and stale securities

• Information specifically on defaulted bonds

•Existing valuation report provided to the Liquidity and Valuation Committee was expanded to include additional reporting on defaulted bonds

•Security sales and purchases back-testing to prices used

•Top 10 fair-valued issuers by market value held in the Trust

•A condensed version of a Level 3 board report

•More summarized and exception-based reporting

•The board requested a summarized rollforward of internally fair valued positions with commentary rather than including details of the decisions along with underlying support

New or changed board reporting that participants reported

FV Survey -- What is happening in board reporting?

18Copyright © 2018 Deloitte Development LLC. All rights reserved.

Governance – The Basics

77% 74% 73% 72% 71%

1% 3% 2% 1% 1%

17% 15% 17% 18%21%

5% 7% 7% 9% 7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2021 2020 2019 2018 2017

Board's Valuation Governance Model

The Board has delegated responsibility for overseeing valuation matters to a separate Board committee (Valuation Committee, Audit Committee, Risk Committee, etc.), subject to the overall Board’s oversight

The Board has not delegated responsibility for overseeing valuation matters to a separate committee; however, one or more Board members have been designated to focus on valuation matters and report back to the Board

The full Board oversees all valuation matters without using a separate committee

Other


Governance – The Basics ****

63%59% 60%

55%

62%

31%28% 27%

31% 31%

6%

13% 13% 14%

7%

0%

10%

20%

30%

40%

50%

60%

70%

2021 2020 2019 2018 2017

Board's Valuation Governance Model

The Board has created a separate valuation committee that is primarily responsible for valuation matters

The Audit Committee is primarily responsible for valuation matters on behalf of the Board

A committee (other than the Board Valuation Committee or Audit Committee) of the Board is primarily responsible for valuation matters on behalf of the Board (e.g., a Risk Committee or an Investment Committee)


14%

22%

26% 27% 28%

8%

11%13%

17%15%

4% 4% 3%1%

11%

0%

5%

10%

15%

20%

25%

30%

2021 2020 2019 2018 2017

Level of detail provided to the Board

Types of material provided to the Board changed

Frequency of Board discussions on valuation

Governance – The BasicsChanges relative to Board Activity and Reporting


Board agenda time spent on valuation matters

35% 34%

26%30% 28%

57% 56%

69%

61% 60%

6% 6%3%

7% 8%

1% 2% 1% 1% 1%0%

10%

20%

30%

40%

50%

60%

70%

80%

2021 2020 2019 2018 2017

Less than 5% 6% to 15% 16% to 25% 26% to 35% Greater than 35%




Change in Board agenda time spent on valuation matters

20%

20%

12%

10%

25%

36%

0%

3%

2%

4%

2%

2%

80%

77%

86%

86%

73%

62%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2021

2020

2019

2018

2017

2016

Stayed the same Deceased Increased


Governance – The BasicsVisiting Pricing Vendors

7%1% 1% 3% 2%

10% 9% 8% 9%16%

65%

76% 77%73% 70%

18%13% 14% 15% 12%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2021 2020 2019 2018 2017

Yes, at least one board member attends every pricing vendor site visit (whenever such visits occur)

Yes, at least one board member attends at least one (but not every) pricing vendor site visit periodically (please explain how the decision is made on which to attend)

No, at least one board member does not attend

N/A, we do not visit pricing vendors


Tool #1 – Proactive Board's "real-time" involvement

11% 11%8% 8% 10%

42% 40% 40%37% 38%

47% 48%52%

55%49%

0%

10%

20%

30%

40%

50%

60%

2021 2020 2019 2018 2017

Governance – Key Tools

Valuation policies and procedures explicitly identify certain circumstances in which one or more non-interested Board members must be involved in the evaluation of the pricing of one or more holdings prior to use of such valuation

Valuation policies and procedures explicitly identify certain circumstances in which one or more non-interested Board members must be notified (within a few days) of the valuation of one or more holdings (Please note that this represents notification and not active participation)

Valuation policies and procedures do not explicitly identify certain circumstances in which non-interested Board members must be notified or must be involved (Please select this even if one or more non-interested Board members may be involved on a real-time basis at management’s discretion or upon an impromptu request from one or more Board members)


Active Board Oversight – Governance – Key Tools

Tool #1 – Proactive Board's "real-time" involvement ALL > $100B AUM

Valuation policies and procedures explicitly identify certain circumstances in which one or more non-interested Board members must be involved in the evaluation of the pricing of one or more holdings prior to use of such valuation

11% 11%

Valuation policies and procedures explicitly identify certain circumstances in which one or more non-interested Board members must be notified (within a few days) of the valuation of one or more holdings (Please note that this represents notification and not active participation)

42% 39%

Valuation policies and procedures do not explicitly identify certain circumstances in which non-interested Board members must be notified or must be involved (Please select this even if one or more non-interested Board members may be involved on a real-time basis at management’s discretion or upon an impromptu request from one or more Board members)

47% 50%

Presenter

Presentation Notes

>$100m represents 36 out of the 94 respondents




0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Pricing of any holdings internally fair valued (vendors/brokersnot used)

The first day a holding is valued using a new pricing source ormethodology that is not included in the valuation policies and

procedures

When a pre-determined threshold is exceeded for anyholdings internally fair valued

When the internal pricing committee/team cannot reach aconsensus on a valuation

When a pre-determined event such as market closure/haltoccurs (as defined in the valuation policies and procedures)

When an unforeseen country, industry, or issuer event occursthat requires management to challenge the validity of the

existing valuation policies and procedures

Reasons Why Involvement Is Required

2017 2018 2019 2020 2021




0% 10% 20% 30% 40% 50% 60% 70% 80%

Pricing of pre-specified holdings that have been valued bya vendor/broker

Pricing of any holdings internally fair valued(vendors/brokers not used)

The first day a holding is valued using a new pricing sourceor methodology that is not included in the valuation

policies and procedures

When a pre-determined threshold is exceeded for anyholdings internally fair valued

When a pre-determined event such as market closure/haltoccurs (as defined in the valuation policies and procedures)

When an unforeseen country, industry, or issuer eventoccurs that requires management to challenge the validity

of the existing valuation policies and procedures

Reasons Why Notification Is Required

2017 2018 2019 2020 2021


Tool #2 – Ad Hoc Valuation Discussions: Did they occur between meetings?


22%

78%

2018

28%

72%

2017

Yes No

Common issues that prompted an ad hoc discussion include:• COVID-19-related valuation issues• SEC Valuation Rule 2a-5• Private equity positions• PIPEs• Recent SEC enforcement case

26%

74%

2019

30%

70%

2021


Active Board Oversight – Governance – Key Tools – by AUM

Tool #2 – Ad Hoc Valuation Discussions: Did they occur between meetings? ALL >$100

AUM

Yes 30% 35%

No 70% 65%


Tool #3 – Valuation Risk Reporting: Does the Board receive summarized reporting on valuation?


Yes No

99%

1%

2019

98%

2%

2021

98%

2%

2018

99%

1%

2020


Tool #3 – Valuation Risk Reporting: Does the Board receive KVIs in a dashboard format?


44%56%

2018

49%51%

2017

Yes No

45%55%

2019

46%54%

2020

46%54%

2021


Active Board Oversight – Governance – Key Tools – by AUM

Tool #3 – Valuation Risk Reporting: Does the Board receive KVIs in a dashboard format? ALL >$100

AUM

Yes 46% 58%

No 54% 42%


Tool #3 – Valuation Risk Reporting: Does the Board also receive detailed data supporting the summarized reports?


0%

10%

20%

30%

40%

50%

60%

2018 2019 2020 2021Yes, but only for some reports

Yes, for all reports

No

Yes, but only when specially requested


Tool #3 – Valuation Risk Reporting: KVIs & Dashboards


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018 2019 2020 2021


Tool #3 – Valuation Risk Reporting: Do boards review information on price Challenges?


67%

63%

74%

67%

67%

60%

57%

52%

40%

33%

37%

26%

33%

33%

40%

43%

48%

60%

0% 10% 20% 30% 40% 50% 60% 70% 80%

2021

2020

2019

2018

2017

2016

2015

2014

2013

No Yes


Tool #3 – Valuation Risk Reporting: Price Challenge Review


0% 10% 20% 30% 40% 50% 60% 70%

Other

We challenge a price only after we have assessed itfor a period of time

We challenge the price when the position has met our internal definition of “stale”

We challenge a price when the primary andsecondary sources vary by a pre-determined

threshold

We challenge a portion of securities when pricesexceed threshold, but not all of them

We challenge a price each time it exceeds a specificthreshold

We challenge a price only when we have conflictingmarket data that would suggest the price is not

accurate

Reasons for Initiating Price Challenges

2021 2020 2019


Technology advancements and solution


Using Technology where it matters most– Responses by AUM

Does your fund complex currently use any of the following ALL >$100

AUM

Excel tools (i.e. macros/queries/pivot tables) 93% 100%

Data management/Data Lake for valuation data 34% 47%

Workflow management tools 35% 50%

Data analytics 36% 56%

Robotics process automation (RPA) 16% 22%

Data visualization tools 26% 47%



Did your fund complex increase automation in the past year by using any of the following ALL >$100

AUM









Is your fund complex exploring the use of any of the following: ALL >$100

AUM








Processing

•Continued automation of pricing tasks

•Started using Robotics to streamline second sourcing of OTC derivatives

Controls

•New validation reports, removal of macro driven processes, new automated price and price source reconciliation to custodians

•Data management to enhance daily reviews of portfolio holdings, identify incorrect data points, and compare vendor sources/transaction prices

•Verify prices used by third party accounting administrators every day via automation

•Have added functionality to bring in 3rd party data to further enhance or clear exceptions that are now matched

•Increased automation around signoff process

Responses from survey participants

Examples of changes in the last year relative to the addition of automation


Reporting

•Automation of Valuation Committee documents

Other

•Use of Data Lake to enable more efficient consumption of pricing/valuation data by business partners. Use of RPA to automatically run reports to feed systems

•Working on using a data lake and centralizing our data for better reporting and more effective use of visualization tools

Responses from survey participants

Changes in the last year relative to the addition of automation


Foreign equity valuation update


• 61% of FV survey participants reported that they use a zero trigger to value foreign equities after the close of the respective foreign markets.

• 39% of those using proxies indicated that they assess the appropriateness of the proxies quarterly, with 33% reporting that they do so annually.

• Most common proxies for those not using a zero trigger.

FV Survey -- What is the current status of foreign equity valuation?

Proxy 2021

S&P 500 14 participants

S&P 500 Futures 9 participants

Other futures contracts 1 participant

Russell 1000 6 participants

Exchange-traded fund (ETF) 0 participants

NASDAQ 1 participants

Other 0 participants


FV Survey -- What is the current status of foreign equity valuation? -- by AUM

Use of a zero trigger to value foreign equities ALL >$100 AUM

Yes 61% 66%

No 39% 34%


FV Survey -- What is the current status of foreign equity valuation?

Most common trigger percentages:

S&P 500

50 basis points

Tie 100 basis points

75 basis points

S&P 500 Futures

75 basis points

50 basis points

No other percentage identified more than once


(shown as the percentage directionally correct)FV Survey -- What is the current status of foreign equity valuation? Effectiveness of trigger approach

16%

26%

0%

39%

6%

3%

10%

0% 20% 40% 60% 80% 100%

Greater than 75%

70-75%

65-70%

60-65%

55-60%

50-55%

Less than 50%

25%

0%

0%

75%

0%

0%

0%

0% 20% 40% 60% 80% 100%

Greater than 75%

70-75%

65-70%

60-65%

55-60%

50-55%

Less than 50%

71%

29%

0%

0%

0%

0%

0%

0% 20% 40% 60% 80% 100%

Greater than 75%

70-75%

65-70%

60-65%

55-60%

50-55%

Less than 50%

25%

0%

0%

75%

0%

0%

0%

0% 20% 40% 60% 80% 100%

Greater than 75%

70-75%

65-70%

60-65%

55-60%

50-55%

Less than 50%

0 bps Trigger 50 bps Trigger

75 bps Trigger 100 bps Trigger


Fixed income pricing


•60% of FV Survey participants use bid pricing exclusively when valuing fixed-income securities

•Just one FV survey participant changed policies or procedures relating to odd-lots.

•79% of FV survey participants value fixed income investments using a price adjusted to reach 4 p.m. EST.

•Fewer participants changed pricing vendors this year compared to recent years.

FV Survey -- What is the current status of fixed-income pricing?

How has your use of pricing sources changed over the last year? 2021 2020 2019 2018 2017

We have changed our primary pricing source for certain securities 11% 31% 22% 20% 20%

We have added or changed secondary pricing sources for certain securities 17% 34% 32% 41% 47%


FV Survey -- What is the current status of fixed-income pricing? by AUM

Use of bid or mean for fixed-income ALL >$100 AUM

Bid for all 60% 58%

Mean for all 27% 28%

Differs based on security type 13% 14%

If you use bid as a default option for all, please select the rationale for using it. ALL >$100

AUM

Traders have indicated that bid is the most representative of actual selling prices 64% 47%

We have performed a study and have determined that bid prices are closer to the actual selling prices 33% 58%

Other 20% 21%


FV Survey -- What is the current status of fixed-income pricing? Other fixed income

How do valuation personnel obtain trading and liquidity information on fixed income securities to better understand the depth of the market?

68%

37%

13%

27%

11%

20%

10%

We obtain information from public sources like TRACE

We obtain transactional information from a traditional pricing vendor

We obtain transactional information and other transactional indicators from other specialized vendors

We obtain information sent to us manually by our front office

We have developed a technologically streamlined system to obtain information from our front office

We do not consider such information in our valuation process



FV Survey -- Other fixed income (continued)

Please specify all of the following that adequately describe your use of proxies and trigger percentages relating to foreign fixed income securities. (Please select all that apply.)

11%

11%

3%

58%

79%

0% 20% 40% 60% 80% 100%


We use trigger percentages

We use proxies

We do not use any trigger percentages

We do not use a proxy


Derivative contract pricing


•70% of FV survey participants indicated that they use settlement prices for listed equity futures even if those times are prior to the time of NAV calculation, and 78% do so for bond/commodity futures.

•Relative to bond/commodity futures, 80% indicated that they would be interested in a 4 p.m. price if a pricing vendor was able to produce one.

•Nearly all FV survey participants indicated that no adjustments are made to achieve a 4 p.m. price.

FV Survey -- Futures valuation


How do you determine valuation for cleared swaps?

FV Survey -- Swaps valuation

How do you determine valuation for non-cleared swaps?

1%

4%

65%

26%

4%

0% 10% 20% 30% 40% 50% 60% 70%

2%

4%

1%

93%

0% 20% 40% 60% 80% 100%

Solely based on quotes from counterpartyPrimarily based on a quote from the counterparty, but internal analysis is

considered to assess reasonablenessPrimarily based on internal analysis, but the quote from the counterparty

is considered to assess reasonablenessPrimarily based on a calculated price provided by a pricing vendor

Solely based on quotes from counterpartyPrimarily based on a quote from the counterparty, but internal analysis is

considered to assess reasonablenessPrimarily based on a calculated price provided by a pricing vendor

Primarily based on clearinghouse pricesOther (please specify below)


Illiquid investments


FV Survey -- Private Equities

Percentage that hold private equity investments

33%

46%

51%

58%

61%59%

62%

57%

30%

35%

40%

45%

50%

55%

60%

65%

2014 2015 2016 2017 2018 2019 2020 2021


FV Survey -- Private Equities – by AUM

Investments in private equity – by AUM ALL >$100 AUM

Yes 57% 78%

No 43% 22%


FV Survey -- Is anything changing relative to the valuation of illiquid investments?

•50% of FV survey participants holding private equity positions indicated that the volume of such positions held in the fund group increased compared to the prior year, a large jump from 21% reporting such last year.

•52% reported growth through active acquisition, while 40% reported that it was through more passive means, such as through restructurings.

•Items now included in risk mission/charter

Aspect in mission/charter % indicating that such was included

Valuation of private equity, SPACs, etc. 10%

Use of non-public information in the valuation process 6%

Use of grey market information in the valuation process 1%


• Use of standardized discounts on restricted securities increased from 15% to 38%

• 40% indicated that they use a standardized format for valuing private equity investments. This is an increase from the 31% reporting such last year and the 27% reporting it when we asked the question in 2018.

• Outlays for investment in technology, infrastructure, and operational support may be required to assist more traditional firms in meeting the rising standards of regulators and demands of investors.

FV Survey -- Is anything changing relative to the valuation of illiquid investments? (continued)


FV Survey -- Private Equities -- Items addressed in Rule 2a-5 ***

Please describe how you consider calibration when valuing private equities. (Please select all that apply.)

51%

57%

26%

30%

34%

13%

0% 10% 20% 30% 40% 50% 60%

Calibrate the model and the assumptions and inputs to equal the initial transactionprice paid to acquire the investment; we document that we have done so

Calibrate the model and its assumptions and inputs to equal the priceassociated with subsequent rounds of relevant financing for the investment

Calibrate the model and its assumptions and inputs to equal theprice associated with relevant market transactions involving comparable companies

While we consider calibration, our process is more general in natureand less precise than the answers above

We document (in memos, minutes, etc.) how we havecalibrated our models whenever we do so



FV Survey -- Private Equities -- Items addressed in Rule 2a-5 (continued)

What describes the results of the back-testing that you perform relative to private equities?

40%

27%

33%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

We perform the analysis and feel that we have learned things that have changed, even if slightly, how we value our private equities

We perform the analysis but do not feel that we have learned things that have changed, even if slightly, how we value our private equities

We do not perform such back testing procedures


FV Survey -- Private Equities Obtain information from portfolio companies?

What mechanism do you have to ensure that the capital structure information used in the valuationof private equities is the most current information?

9%

33%

46%

12%

0% 10% 20% 30% 40% 50%

Portfolio companies are required to reach out to us with any changes

Rely on scheduled touchpoints that the investments team or others have with the portfolio company personnel in which questions on the capital structure are required to be asked

Rely on general communications that the investment team or others may have with portfolio company personnel



Other fair valuation survey key observations


FV Survey -- What are some post-pandemic changes that have stuck?

Changes originally made during the onset of the COVID-19 pandemic –Now part of ongoing practices

–Now part of ongoing practices but only when triggered by specific circumstances

Instituted materiality thresholds for investigating daily pricing differences 7% 5%

Changed materiality thresholds for investigating daily pricing differences 8% 13%

Instituted flexible/dynamic price tolerances as opposed to static tolerances 3% 12%

Changed procedures for price challenge process 4% 5%

Changed procedures for price challenge process when prices are reaffirmed by pricing vendor 1% 1%

Instituted procedure with front office relative to the pricing process 2% 9%

Changed back-testing procedures 2% 1%

Instituted a technology change (e.g., increased use of macros or some form of automation) 8% 1%

Changed roles for certain tasks between internal valuation committee, other members of the investment adviser, and/or the fund accountant 0% 1%


•NAV contingency process

−Nearly half of FV survey participants pointed to reliance on a third-party fund accountant’s process.

−Just under 15% of FV survey participants mentioned an internal contingent NAV process that their fund group has in place.

−Remaining FV survey participants indicated less formalized plans to strike NAVs based on the facts and circumstances in place whenever such event occurs.

•11%, compared to 14% last year, made changes to the BCP related to the investment valuation process.

FV Survey -- Contingency planning and valuation


•Added an exception management price review software to run a full parallel price review against our fund administrator

•Enhanced macro automation to increase processing speed for daily reviews of vendor prices against other market color

•Established default methodologies for certain situations that allow a specific valuation method to be used without fair value committee approval at each occurrence

•Made improvements to fair value forms so they can be completed more efficiently and without paper

•Increased use of standing instructions (where applicable) as well as utilizing waterfalls (if not a, then b, then c, etc.)

•Added new processes for valuation of new products such as ETFs and SMAs

•Created a more centralized pricing group

•Created a new position for a full-time valuation specialist

FV Survey -- What are some interesting things that participants have implemented over the last year?


Looking Ahead – What is on the Horizon?

6969Investment valuation and governance: Industry trends and benchmarkingCopyright © 2020 Deloitte Development LLC. All rights reserved. 69

THANK YOU!!!

Question & Answer

Happy Holidays & Stay Safe!!!


Contact information

Tom WinesManaging DirectorDeloitte & Touche [email protected]

Paul KraftLead PartnerDeloitte & Touche [email protected]

Katie YorraSenior ManagerDeloitte & Touche [email protected]

mailto:[email protected]



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