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Issues effecting investors (2008)


Mark-to-Market (or "Fair value accounting")


New accounting rules will change the way accountants record the value of companies.  Rather than using the "historical" cost on the Balance Sheets, there are new rules that assets must be valued as if they would be sold today ("marked to market")


Impact:  More volatility


Impact on the Private Equity industry:  The private equity industry is going to be hit by volatility in accounting for their assets, as newly adopted rules force them to mark down the value of their portfolios, high profile private equity bosses cautioned on Tuesday.  Mark-to-market, or "fair value" accounting, took full effect this year, requiring companies to value assets at current comparable prices.  The rules are known as FAS 157, which defines how companies should use fair value, and FAS 159 which lets companies elect to use fair value for certain assets and liabilities.


"In many instances the LBO funds are going to be forced to mark assets to market for first time," said Thomas H. Lee, president of Lee Equity Partners, a $7 billion hedge and leveraged buyout (LBO) firm. "Many haven't done this in the past."  "It will be brave new world out there," Lee, who left the buyout firm that bears his name, Thomas H. Lee Partners, in 2006. "Just as we see mark downs we will see mark ups. So the class itself will be very volatile."  read more from: Reuters 06/03/2008


The notion of "fair market value" for private-equity portfolio companies has been thrust into the spotlight. New accounting regulations, specifically Financial Accounting Standards Board Rule 157, or FAS 157 for short, require buyout firms to use different techniques to determine the "mark-to-market." In the past, the value of an asset has usually been stated as the purchase price, unless there had been an actual realization or some other material gain or loss.

Under the new rules, firms will have to calculate values based on hypothetical exits each quarter. In other words, at the time of the valuation, a private-equity firm will have to guess, based on recent secondary transactions or IPOs of similar companies, what the value of a given asset should be. In today's volatile market where public companies are hard to value, putting a theoretical price tag on a private company will become the new alchemy. 



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