Performance Perspectives Blog

Getting quoted

by | Jun 8, 2013

When I was in politics I was quoted almost weekly, about one thing or another. And I quickly learned that despite all that you may share with a reporter, you cannot and never will control what is written. Sometimes, what gets quoted is not what you had hoped, while at other times you’re quite pleased with what’s been shown. As my friend, Steve Campisi, put it, “As long as they spell your name right, and you have a strong and clearly worded opinion that is reasonable, then even if you come across too strong you’re still the better for having been quoted.” Reporters have limited space, and often seek input from multiple people. And so, while they may speak with you for 20-30 minutes, you may get a single line in the article.

I was quoted in this weekend’s WSJ (page B9) about private equity valuations. Everything that was attributed to me is accurate. The reporter was kind enough to send me what he intended to include so I could have a look. Overall, I think it’s an excellent piece and brings to the attention of investors some of the risks and issues of investing in less liquid assets. I will share a bit more here on this subject.

I referenced the GIPS(R) standards (Global Investment Performance Standards) as a guide for valuations. I mentioned the three levels for private equity and the broader valuation principles for other valuations. I believe these hierarchies are “best practice” to value securities; especially less liquid ones.

When dealing with illiquid assets, valuations can always be tricky; they call for good judgment. While there are guidelines and standard approaches available, the accuracy is always questionable. During the most recent financial crisis, many individuals recognized that the valuations on their MBS securities were high, but could do little about it. I recall that then Congressman Barney Frank suggested that firms who question the accuracy of prices be permitted to show two: what’s quoted and what they believe is true.

I suspect that most private equity investors do a good job of pricing their assets. If anything, they may be conservative and underprice them, knowing that when the asset eventually goes public, they would prefer a higher than lower return. I used a line made famous by President Obama’s former pastor, “when the chickens come home to roost,” as a metaphor for the eventual sale of an asset. If the manager had underpriced it, then when the sale occurs the reality will set in. This should be incentive to avoid intentional underpricing of assets. No doubt our industry will always have its share of fraudsters, thus the suggestion that investors understand the rationale behind valuations.

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