Venture Capital Fund: SEBI seeks details on startup valuation of private equity funds, venture capital funds

Mumbai: The capital market regulator takes a closer look at how private equity firms (PE) and venture capital funds (VCF) value start-ups and the companies they fund.

The backed valuation gives a rosy picture of the portfolio to the fund investors and paves the way for the fund manager to attract more money from new and old investors when he goes for the next round of fundraising.

Possibly spurred by complaints from investors and recent reports about the opaque accounting of a few unicorn companies, the Securities and Exchange Board of India (SEBI), in a call dated September 6, asked a large number of funds to disclose their valuation practices and share details such as The qualifications of the appraiser, whether the designated appraiser is a partner, manager, or sponsor of the fund, and if there has been a significant change in valuation methodology in the past three years among other things, two people told ET.

Mind over money

“Sebi clearly wants to understand the credibility of the valuation process that the funds are doing,” said Ritchie Sanchetti, founder of the law firm Ritchie Sanchetti Associates. According to Tejesh Chitlangi, Senior Partner, IC Universal Legal, “While the regulator is trying to get a feel for the performance of AIFs (Alternative Investment Funds), it may also want to understand the valuation practices prevailing in the industry such as may vary across funds in the absence of any regulatory prescription.


Consistency in the evaluation process

This may be a prelude to upcoming valuation policies, enhanced disclosure standards etc., which SEBI may impose on the AIF industry to bring consistency in the way valuations are conducted and increase transparency in the investor’s interest.” VCFs – are closed-end funds with significant exposure to unlisted stocks. Open-ended funds are required to publish each month their Net Asset Value (NAV), which is the market value of the securities held by the fund or scheme, Expired funds may report their NAV twice a year, or even annually if investors agree.

Although closely owned companies and unlisted securities are outside its purview, Sebi regulates pooled vehicles such as PE and VCF, mutual funds and portfolio management schemes.

Required details

As per Sebi’s guidance, funds are also required to share the following information – the date of the last valuation, the cumulative cost of investments made, the last valuation of the investment portfolio, whether the valuation is based on audited or unaudited data of the investee companies, whether the valuation was made by An internal or independent appraiser, if an additional appraisal was performed during a fiscal year, accepted the details of the appraisal methodology and whether there were any deviations from the stated methodology, and whether the system had an appraisal committee.

“The manager’s actual economy comes only on the basis of dividends under a structured waterfall structure,” Sanchetti said. “The current exercise appears to be aimed at ensuring that the fund plans an accurate health condition for investors on an ongoing basis.” .

Under the waterfall mechanism, cash generated from the sale of shares and dividends paid by investee companies first goes to the investors of the fund with fund managers receiving their “carry” only if the fund’s performance exceeds the hurdle or preferred rate of return. For example, if the hurdle rate is 14% and the fund is posting a return of 18%, the additional 4% (above the hurdle) will be shared between the fund’s investors and the fund manager in a ratio of 80:20.

With the emergence of AIFs in recent years as the investment vehicle of choice for many wealthy Indian investors, SEBI has been tightening the rules for these funds. A year ago, Sebi said that AIFs should have independent trustees unrelated to the sponsor and fund managers. A few months ago, at a meeting of the Alternative Investment Policy Advisory Committee, SEBI officials suggested that the schemes of personal capital and venture capital funds should be surrounded so that no stresses or obligations would seep into a single pool of funds. etc.

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