CHICAGO – On Jan. 22, the Illinois Venture Capital Association held a panel discussion that focused on fair-value accounting. The session, which was sponsored by Deloitte, was moderated by William Hupp of Adams Street Partners, LLC.

Held at the newly remodeled Metropolitan Club of Chicago at the Sears Tower, Bob Bartell of Duff & Phelps, LLC, Karen Fanelli of Frontenac Company, Lee Mitchell of Thoma Cressey Equity Partners and John Stomper of Deloitte contributed to the panel.

Jim TenBroek of Wind Point Partners with other members of the Institutional Investors’ Committee helped organize the panel.

Hupp kicked off the panel noting that the focus on fair-value accounting occurred concurrently with the bursting of the venture capital bubble earlier in the decade. The volatility of that era contributed to rapid fluctuations of the value of many portfolio companies.

“During the recession, public equities went down,” Mitchell said. “LPs noticed that private equity didn’t move. They saw this as a problem.”

Accordingly, more attention was paid by limited partners and auditors to assign values to portfolio companies between financing rounds and transactions. The panel focused on the emerging methodologies of fair-value accounting and all acknowledged that there is no one standard in place.

Mitchell is a member of the Private Equity Industry Guidelines Group (PEIGG), which is a volunteer association that exists to set better reporting standards for the industry.  (More info at PEIGG.org)

“While we are close to having a uniform standard, that doesn’t mean all valuations will be the same,” Mitchell said.

Fanelli put together PEIGG guidelines on behalf of Frontenac in 2003 and acknowledged that it makes her job as CFO more time consuming. She added: “It is a very subjective area.”

Bartell noted that first-time funds are incorporating fair-value accounting practices as a way to differentiate and recruit investors. Additionally, the rise of hedge funds has also influenced how the market views reporting.

“LPs want the flexibility of trading in and out of securities,” Bartell said.

For the best results within this evolving practice, Stomper explained it is important for deal teams to work in concert with CFOs and auditors to get the most accurate value. He concluded: “It is a collaborative effort.”