How Technology Supports a Compliance-Oriented Valuation Process

How Private Equity GPs Can Use Technology to Improve the Auditability of Valuation Metrics and Processes

Disparities between private and public market valuations, coupled with higher interest rates, have intensified LPs’ scrutiny of private market valuations. Concurrently, significant growth in the private markets has fuelled regulatory interest in valuations. Both the SEC and FCA have launched a series of initiatives to enhance valuation transparency.

As a result, general partners (GPs) face increasing pressures to maintain a granular audit trail of their valuation metrics and approval layers — a task most legacy valuation workflows cannot accommodate. To meet enhanced transparency demands, GPs must adopt technology capable of preserving sufficient documentation of valuation processes and outputs.

Legacy Valuation Workflows Lack Sufficient Auditability

Legacy valuation workflows restrict a firm’s ability to audit and track valuation data, model iterations, and review processes.

When valuation workflows occur purely in Excel, firms must manually parse through portfolio company documents each quarter for financial inputs and transfer these values into each portfolio company’s respective valuation model and workbook. This approach exposes models to human error and requires a significant validation effort. If a deal team member accidentally inserts incorrect financials into a model or a macro references an incorrect workbook, firms can’t easily trace the compromised input back to its source.

Auditability concerns also surface when teams finalize their valuation models, initiate approval processes, and extract outputs for downstream use. Downloading models and sending them for review over email poses several hurdles to auditability and version control. Without a centralized technology hub, firms struggle to track file locations, reviews, and model oversight.

This approach especially complicates iterations. When teams make model adjustments, they must download a new workbook and send it for review. This can create lengthy email chains that inhibit firms from effectively recording and tracking iterations within the same period, shifting the role of valuation committee members from subject matter experts to project managers. When Managing Directors devote time to locating models on shared drives or identifying team members involved in different iterations, it impedes their ability to concentrate on value-add tasks, posing operational risks for the firm.

Firms using a manual valuation approach will also struggle to aggregate valuation outputs in a way that supports auditability. When teams operate purely in Excel, they must manually extract valuation outputs into a centralized spreadsheet or shared drive. Copy and paste creates a barrier to traceability — firms cannot fully and efficiently track an output to its source. Macros and advanced references also create version issues.

Additionally, without a system that centralizes and captures the workflow, firms risk downstream stakeholders inadvertently using values that conflict with finalized models. With ten versions of a portfolio company’s quarterly valuation model housed on a shared drive, an investor relations team member could easily retrieve data from the wrong version, causing reporting inaccuracies.

Creating a Single Source of Truth for Valuation Data and Workflows Enhances Auditability

The SEC’s focus on valuation substantiation and LPs’ demands for greater valuation transparency require firms to incorporate modern technology into their valuation workflows. GPs can use technology to create a single source of truth for valuation data, create a record of their valuation process, and trace valuation inputs and outputs back to their source documents — providing unmatched auditability.

Automating the ingestion of portfolio company financials into a central repository allows firms to aggregate validated valuation figures in a centralized location and pull those approved values directly into valuation processes, improving auditability and data quality. Firms can easily see team members responsible for approving portfolio company financials along with the underlying documents.

Bringing valuation review and approval workflows into the cloud also offers significant auditability benefits. Firms can integrate and capture structured reviews and validations of valuation outputs and models, supporting a compliance-oriented framework. Stakeholders can easily track outputs to their source document, approvers at different stages, file upload dates, and team member involvement.

Consolidating model iterations and valuation outputs for each portfolio company in the cloud allows firms to create a centralized record of valuations across their entire portfolio. GPs can easily access all the model iterations for a certain portfolio company in a given quarter, the full history of the valuation basis used, as well as the calculated multiple, resulting enterprise value, and other valuation outputs.

Further, teams can lock the submission period each quarter to prevent overrides after approval and ensure stakeholders use finalized values in downstream processes, such as ingesting valuation outputs into accounting systems or quarterly LP reporting.

Ultimately, firms can incorporate technology alongside their existing Excel-based valuation workflows to implement auditable valuation processes and meet growing transparency demands from regulators and LPs.

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