April 19, 2021

Volume XI, Number 109

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April 16, 2021

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Valuation in Times of Market Disruption

Valuation practices will continue to be the subject of disputes. Particularly in times of economic disruption and market volatility, buyers and sellers are more likely to have substantial differences of opinions on valuation, which often lead to the use of earn-outs and resulting post-closing disputes. Use of a cost basis for recently acquired assets may also lead to disputes regarding valuation, because using cost alone may be incompatible with the concept of fair value, which should take into account recent changed circumstances. We also expect increased scrutiny on valuations in connection with Manager/GP-led secondary transactions where the Manager/GP is often conflicted by virtue on being on both sides of the transaction.

From a regulatory perspective, valuation is a perennial SEC priority for private fund managers, and this year will be no different. The SEC Division of Examinations’ June 2020 Risk Alert for private fund managers (and a later risk alert) noted common adviser deficiencies in valuing assets in accordance with stated valuation processes or as disclosed to clients, potentially leading to inflated fees and carried interest. With the SEC’s recent adoption of a new regulatory framework for valuation practices for registered funds and BDCs, the SEC may want to test and validate compliance with the new principles. The SEC has also shown over the last year (see here and here) that it will pursue enforcement actions focused on valuation against credit managers, as well as private equity fund managers. Fund sponsors should be prepared for SEC investigations or enforcement actions related to the valuation of portfolio companies (particularly when interim values are used in fundraising) as well as follow-on inquiries from or disputes with unsatisfied fund investors.

Read more of our Top Ten Regulatory and Litigation Risks for Private Funds in 2021.

Co-authored by Joshua M. Newville, Todd J. Ohlms, Seetha Ramachandran, Ana Vermal, Samuel J. Waldon, Jonathan M. Weiss, Anthony M. Drenzek, James Anderson, Alexandra V. Bargoot, William D. Dalsen, Adam L. Deming, David W. Heck, Hena M. Vora and Lucy C. Wolf. 

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© 2021 Proskauer Rose LLP. National Law Review, Volume XI, Number 96
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About this Author

Margaret A Dale, Commercial Litigation, Proskauer Rose Law Firm
Partner

Margaret Dale is a Partner in the Litigation Department, resident in the New York office. Her practice focuses on commercial litigation, including class action defense, as well as intellectual property, privacy and data security, corporate governance litigation, securities litigation, and regulatory and internal investigations. She also represents and counsels clients in art law matters. 

212.969.3315
Michael R. Hackett, Litigation Attorney, Proskauer Law Firm
Associate

Michael R. Hackett is an associate in the Litigation Department and a member of the Asset Management Litigation practice. His practice focuses on disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to...

617-526-9723
Kirsten Lapham FInancial Services Attorney Proskauer Rose Law Firm, United Kingdom
Partner

Kirsten Lapham is a partner specialising in financial services regulation. She advises a broad range of both institutional and individual clients on a variety of financial services regulatory and compliance issues. Her practice has a specific emphasis on the regulatory issues arising under the AIFMD, and MiFID II for a range of EU and indirectly impacted firms outside of the EU.

Experience in this area includes advising multiple clients on the EU marketing and registration regimes and overlaying local regulatory considerations, such as the U.K. retail distribution...

+44.20.7280.2031
William Komaroff Litigation White Collar Attorney Proskauer Law Firm New York
Partner

Bill Komaroff is a partner in the Litigation Department and White Collar Practice Group. He has a nationwide federal practice focused on corporate defense and investigations, counseling and defending institutional and individual clients in connection with a broad array of complex government investigations, prosecutions and civil disputes.

Bill also has served as a member of the Criminal Justice Act Panel for the District Court for the Southern District of New York.

From 2003 to 2007, Bill served as an Assistant U.S....

212-969-3975
Timothy W. Mungovan, Litigation Attorney, Proskauer Law Firm
Partner

Timothy Mungovan is a Partner in the Litigation Department, co-head of the Private Investment Funds Disputes practice and a member of the Private Investment Funds Group. Tim has an international practice in complex commercial litigation, advising public and private companies in a variety of areas, including securities, corporate governance, fiduciary obligations, investment management and financial services, fraud and trade secrets.

In addition to his regular commercial litigation practice, Tim focuses on disputes involving private investment...

617-526-9412, 212-969-3201
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