IPEV guidelines for valuation
Neeraj Agarwal
I Neeraj Agarwal, am a Fellow Member of ICAI, practicing under the banner of M/s AAN & Associates LLP, a firm based out of Banglore Mumbai.
I am also registered under Insolvency and Bankruptcy Board of India as a Registered Valuer for valuation of Security or Financial Assets (Passed in Feb 2020)
I am also holding Bachelor of Commerce (B. Com) degree from Calcutta University (Passed in 2011).
I have corporate working experience in Wipro. After working in Wipro for a short period I started my practice in late 2013 and have been in practice so far for the last 10 years. I have also completed a Certificate Course by ICAI on IND-AS in 2020. I have also cleared Social Auditor Exam conducted by NISM.
I have been inducted as a Special Invitee to the Sustainability Reporting Standard Board, ICAI for the FY 2023-24.
The IPEV Guidelines are a set of globally-accepted, principles-based best practices for valuing private capital investments — including venture capital, private equity, infrastructure, credit, etc. The term “private capital” is broad, covering early-stage companies, growth capital, mature buyouts, and more. The underlying goal is to ensure that valuations are done fairly, transparently, and in a way that’s consistent across funds, geographies, and investors.
These Guidelines are not legal rules, but they are widely used by fund managers (GPs), limited partners (LPs), auditors, and regulators, and often included in fund documents or used as a benchmark in investor reporting.
IPEV updates its Guidelines periodically to keep pace with market practice, accounting/regulatory changes, and evolving investor expectations. The latest full edition was released in December 2022, superseding the earlier version from 2018.
The International Private Equity and Venture Capital Valuation (IPEV) Guidelines are issued by the IPEV Board, also known as the International Private Equity and Venture Capital Valuation Board.
The IPEV Board is supported by several major industry associations, such as:
- Invest Europe
- BVCA (British Private Equity & Venture Capital Association)
- AFIC (France Invest)
- ILPA (Institutional Limited Partners Association)
- AVCAL (Australian Investment Council)
- LAVCA (Latin American Venture Capital Association)
- NVCA (National Venture Capital Association – U.S.)
- Other associations from Asia, Africa, and Latin America.
Key Changes & Features in the December 2022 Edition
Some of the most important additions, clarifications, or shifts in the 2022 edition are:
- Early-Stage and Pre-Revenue Companies
For startups or early-stage companies without revenues, the updated Guidelines stress additional qualitative and performance indicators. These include cash burn, whether key milestones are being met, market acceptance, exit strategy, timing of the next financing, etc. The capital structure (share classes, rights/preferences) must be considered. - Debt Investments Valuation
There is more guidance on how to value debt instruments (non-equity/private debt) when markets are thin or not active. Specifically, the Guidelines recommend using discounted cash flows with appropriate discount rates (risk-free rate plus credit spread) rather than simply applying par value if it is not representative. - Market Dislocation / Distress
When markets are volatile, or there is macroeconomic disruption (e.g. geopolitical, pandemic, inflation, etc.), recent deals or multiples may not reflect “fair value”. The Guidelines suggest applying professional judgment, possibly giving more weight to income-based approaches (like DCF), scenario, or sensitivity analysis. - Known or Knowable Information at the Measurement Date
The Guidelines emphasize that valuations should reflect all information that is known or reasonably knowable as of the valuation date. Even if certain events are after the date, if they could have been anticipated or in the pipeline, they may affect value. - ESG (Environmental, Social, Governance) Integration
A newer focus is on ESG: both quantitative and qualitative factors. This means asking if ESG factors could affect cash flows, risk profile, regulatory risk, peer benchmarking, etc. The 2022 edition includes explicit guidance to integrate ESG when known or knowable. - Contractual Restrictions, Liquidity, and Rights & Preferences
The updated Guidelines clarify how to handle share class preferences, rights, and liquidity constraints. For example, restrictions that are “contractual restrictions applicable to securities” (e.g., lock-ups) should be treated carefully – the Guidelines make clearer when discounts are appropriate and when not. - Data Quality and Comparables / Multiples
There is more emphasis on using high-quality, comparable peer companies / recent investments when using multiples, and ensuring that the peer set is relevant (size, industry, geography, performance, etc.). The better the comparables, the more credible the multiple-based valuations. Also, ensure inputs are reliable.
Why the IPEV Guidelines Matter
- Standardization and Comparability: With many funds and investors spread across geographies, it helps if everyone is using similar principles to value investments. This aids transparency between funds and LPs and helps investors make apples-to-apples comparisons.
- Regulatory & Accounting Alignment: The Guidelines align with IFRS 13 and US GAAP fair value measurement concepts. They help ensure that fund reporting (for financial statements, investor reports, and Audits) will be consistent with accounting standards.
- Better Decision-Making and Risk Management: Using rigorous valuation approaches (including the handling of debt, dislocations, and qualitative factors) lets GPs, LPs, and stakeholders see not just what a portfolio company looks like now but also what could impact its value — both upside and downside.
- Investor Confidence: LPs, auditors, and regulators are increasingly demanding credible valuation practices. Funds that adhere to IPEV are often seen as more reliable or lower risk from the perspective of valuations.
Adoption & Current Trends (Including in India)
Global
Many private equity/venture capital funds, institutional investors, and professional valuation firms treat IPEV as a de facto standard. The NVCA (US) and various European and Asia-Pacific associations have endorsed the Guidelines.
The link between IPEV and other valuation-standard bodies (e.g., the IVSC – International Valuation Standards Council) has been strengthened; there is growing alignment between IPEV’s private capital-specific guidance and broader global valuation standards.
India
- The Indian Venture and Alternative Capital Association (IVCA) has officially endorsed the IPEV Guidelines. This helps push adoption within Indian AIFs (Alternative Investment Funds) and other private capital investors in India.
- SEBI has also moved to standardize the valuation approach for AIFs. In 2023, SEBI issued a circular (June 21, 2023) standardizing valuation norms for AIF portfolios, following recommendations from the Alternative Investment Policy Advisory Committee (AIPAC). IVCA’s endorsement of IPEV is part of that alignment.
- One of the changes under consideration (or already implemented in proposals) is distinguishing the valuation methodology for unlisted securities (private investments) from that for mutual funds / traded securities. Unlisted, non-traded private companies need different valuation approaches (DCF, recent investment, comparable multiples, etc.) given that market prices aren’t observable. The IPEV Guidelines are seen as better suited for that.
Practical Implications & Challenges
While the Guidelines are a great resource, implementing them well has its own challenges. Some of these are:
- Data Limitations: Often, especially in emerging markets, finding truly comparable peers, reliable financials, or recent transactions is hard. Valuations may have to rely on imperfect inputs. This increases uncertainty.
- Judgment & Subjectivity: Many aspects (e.g., forecast of future cash flows, discount rates, exit timing, growth, probability of achieving milestones) are subjective. Different valuers may reach different conclusions using the same framework.
- Market Dislocation: During crises or rapid shifts (economic, regulatory, geopolitical), even recent transactions may be stale or misleading. Choosing which method or how to adjust becomes harder.
- ESG Integration Complexity: Quantitative ESG factors are often easier to include, but qualitative ESG (governance risk, regulatory risk, environmental concerns) may be difficult to model with precision. Also risk of “double counting” or unintentionally over- or under-adjusting.
- Regulatory / Tax Constraints: In many jurisdictions, tax or securities law may have rigid rules/definitions that may not align neatly with all parts of IPEV. For instance, some jurisdictions may not allow certain kinds of adjustments, or may require certain disclosure or timing that differ from IPEV.
- Operational Burden & Costs: Doing full valuations periodically (semiannual or annual), gathering data, doing sensitivity and scenario analyses, documenting all assumptions, peer comparisons, handling audits — all these cost time and resources. Smaller funds or early-stage startups may find this burdensome.
Best Practices
To get the most out of using the IPEV Guidelines, these are some recommendations / best practices:
- Use Multiple Valuation Methods — unless one clearly dominates in context. Cross-check via comparables, recent investment rounds, DCF, and income approaches.
- Document Everything — assumptions, peer selection, rights/preferences, contractual restrictions, growth expectations, and exit assumptions. Be explicit about what is known / knowable at the measurement date.
- Sensitivity and Scenario Analysis — especially under uncertainty or in dislocated markets. Include a base case, downside case, and upside case to demonstrate how valuation shifts.
- Review Capital Structure Impacts — different share classes, liquidation preferences, voting rights, etc., affect value and risk. Don’t ignore them.
- Ensure Data Quality & Relevance — peer companies used for multiples should be comparable in size, geography, business model; recent transactions should be adjusted for any changes since then.
- Update Regularly — valuations should reflect current conditions at each measurement date, not just carry forward older values.
- Transparency to Stakeholders — LPs, auditors, founders, and regulators should have visibility into how valuations were arrived at, what adjustments were made, and where subjectivity was involved.
Conclusion
The IPEV Guidelines are a central tool in private capital valuation globally. The December 2022 update strengthens their relevance, especially by addressing early-stage valuations, ESG, market dislocation, better handling of debt, and emphasizing known or knowable information.
In India, adoption is accelerating, with IVCA’s endorsement and SEBI’s recognition of the need for distinct valuation norms for unlisted or private investments, thereby aligning more closely with IPEV.
For practitioners — whether GPs, startup founders, LPs, or auditors — the message is: using IPEV-aligned practices helps in producing credible, transparent, and defensible valuations. However, effective implementation requires good data, clear assumptions, disciplined judgment, and thorough documentation.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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