Valuation Agent: Independent Pricing of Unlisted Holdings

An independent valuation agent is a third party engaged to value the holdings a private fund cannot price on a screen. Palani Valuation Advisors LLP, an invented limited liability partnership, values every unrealised holding of Nilgiri Growth Partners Fund II, invented, once a year, the manager marks in between, and Kolar Fund Services Private Limited, invented, strikes the net asset value from whichever mark is current.

Read that answer again and count the parties. There are three, they do three different jobs, and they do those jobs on three different timetables. Almost every misunderstanding about private valuation begins by collapsing the three parties into one, usually into the manager, and then being surprised at the limits of the arrangement. A reader who believes that one independentEngaged separately from the manager, answerable separately, and signing separately. party prices everything continuously has the arrangement wrong in every particular: wrong about who, wrong about what, and wrong about when.

Who is paying the party that decides what these holdings are worth?

A process only makes sense as an answer to something, so start here, before any process. The party valuing the assets is paid by the fund whose assets they are. Palani Valuation Advisors LLP, invented, sends its invoice to Nilgiri Growth Partners Fund II, invented, and that invoice is settled out of money drawn from the investors of that same fund. Nobody hides this. The valuer's fee sits inside the fund's operating expenses alongside the administrator, the auditor, legal, custody and the investor advisory committee's own costs. Operating expenses together ran at Rs 80,00,000 a year across Years 1 to 8 of that invented fund.

Naming the payer is not an accusation, and the arrangement is not peculiar to this invented fund. The conflict is structural. Somebody has to pay for a valuation, the investors are the people who want one, and the fund is the vehicle their money already sits in. A valuer paid by one investor is answerable to that investor rather than to all of them, so the obvious alternatives are not plainly better either. A named consent and a stated process answer a structural conflict. A claim that everybody involved intends well does not. Both exist on this invented fund and both are worked out below: the investor advisory committee consents on valuation policy, and the agent is engaged separately, answerable separately and signing separately.

The shape of that answer matters even before the detail arrives. Nobody is being asked to believe the arrangement removes the conflict. The arrangement states who pays, where in the fund's own expense line the money sits, and which named body has to agree the basis on which the work is done. All three are checkable facts. A reader handed the process first, with the conflict never named, hears reassurance instead of a problem, and then has nothing left to check.

What is the valuation agent engaged to do, and over how much of the fund?

Think about a jeweller who values a household necklace for an insurance policy. The jeweller does not buy the necklace, does not find a buyer for it and does not promise the household anything about what it would fetch at a shop. The jeweller is engaged, once a year, to write down a considered figure on a stated basis and to sign it. Nobody in that household confuses the jeweller with a customer. An independent valuation agentA third party engaged to value holdings that cannot be priced on a screen. is that jeweller, working on companies instead, and the confusion to be cleared up is exactly the one no household would make about a necklace.

On Nilgiri Growth Partners Fund II, invented, the agent is Palani Valuation Advisors LLP, invented, and the engagement covers every holding the fund has not yet sold. Rohit Vaz is its signing partner, and the annual valuation report goes to investors as one of the things the fund sends them. The agent is handed the holdings, the fund's written valuation policy and whatever the portfolio companies report to the fund. The agent is not handed a buyer, an offer or an instruction about where the figure should land.

The size of the job changes with the age of the fund, and this is the part a reader almost never pictures. At the start of that fund's Year 6 all nine of its holdings were still unrealised, so all nine needed a value. Every figure here is stated as at the end of its Year 9 Quarter 2, the record date. At that record date four holdings have left the portfolio entirely and five remain. A holding that has been sold needs no valuation at all: it has a receipt. So the valuation task shrinks from nine holdings to five while the money resting on it stays large, at Rs 2,82,00,00,000 of carrying value.

This invented fund can be described three ways at the record date and only one of the three descriptions gives five, so the counting needs care. Four holdings are gone entirely, being three sold and one written off in full. Five are still held. One holding was forty per cent realised and the other sixty per cent of it is still held, so there are five exit events across five holdings. Nine holdings, four gone, five held: those are the counts used throughout, and the holding that sits on both sides of the line is holding 9.

The agent looks at exactly this list on the day it does the annual valuation. Every rupee below belongs to Nilgiri Growth Partners Fund II, invented, at the end of its Year 9 Quarter 2, and the right-hand column is a division of the two columns beside it and nothing more. The total row says that the five remaining holdings of Nilgiri Growth Partners Fund II, invented, were carried at Rs 2,82,00,00,000 against Rs 1,80,00,00,000 of acquisition cost at the end of its Year 9 Quarter 2, being 1.57 times.

One line in that table is worth pausing on, and it is the only line where the carrying value is below what the fund paid. Holding 6 of Nilgiri Growth Partners Fund II, invented, is Vaigai Edutech Private Limited, invented. Vaigai Edutech cost Rs 30,00,00,000 and is carried at Rs 21,00,00,000 at the end of that fund's Year 9 Quarter 2, being 0.70 times its cost. A process that produced only figures above cost would say something about the process rather than about the companies, and this one does not. That single row is the cheapest evidence a reader has that marks under this invented arrangement move in both directions. The row is no evidence that any particular figure is right.

How do the annual valuation and the quarterly marks fit together?

Two clocks run at once and they are not the same clock. Palani Valuation Advisors LLP, invented, values every unrealised holding of Nilgiri Growth Partners Fund II, invented, once a year. In the three quarters between one annual valuation and the next, the manager, Nilgiri Alternatives Advisors Private Limited, invented, makes the quarterly markThe value a holding is recorded at between one full valuation and the next. itself. Both cadences are the contracted terms of this invented fund, written into its documents before any of this happened, and neither is presented here as a rule that applies to anybody else.

The consequence is that a carrying value in a reader's hands is somewhere between nought and four quarters away from the last full independent valuation, and the figure itself does not say which. A pack issued immediately after the annual valuation and a pack issued three quarters later look identical on paper. Same layout, same rupee format, same confident total. One of them rests on work signed by Rohit Vaz within the last few weeks; the other rests on three subsequent quarters of the view the manager itself took. Neither is hidden and neither is disclosed by the number.

This is why the first question an experienced reader asks of a private valuation is a date question rather than a value question. On this invented fund the answer at the record date is unusually clean and worth stating plainly: nothing was revalued in the two quarters after that fund's Year 8 year end, so the Rs 2,82,00,00,000 that recurs throughout is the Year 8 year-end figure carried forward. Two quarters old, and the fund says so.

Who strikes the net asset value, and is that the same party as the valuer?

No, and this is the third party, the one readers most often forget exists. Kolar Fund Services Private Limited, invented, is the administratorThe firm that keeps a fund's records and strikes its net asset value. of Nilgiri Growth Partners Fund II, invented, and Ashwin Baliga is the fund controller there who strikes the net asset value. Striking it means taking whatever value is currently attached to each holding, adding those values up, adjusting for the fund's own cash, receivables and liabilities, and producing the single fund-level figure that goes onto the statement.

Look carefully at the boundary of the administrator's job. The valuer and the manager each form a view about one holding; the administrator forms no view about any holding at all and instead produces a total. Those are different objects. A holding value is an opinion about a business. A net asset value is an addition performed over whatever opinions are current, plus the fund's own balances. Ashwin Baliga does not decide that holding 4 is worth Rs 1,08,00,00,000, and Rohit Vaz does not decide what the fund as a whole is worth.

An everyday version helps. A household is selling a flat and a car. A property valuer writes down a figure for the flat. A dealer writes down a figure for the car. The household accountant adds the two, subtracts the loan still outstanding on the car, and writes the household net worth on one line. Three parties, three objects, three moments. Nobody would say the property valuer decided the household net worth, and nobody should say the valuation agent decided the fund net asset value.

What does independent actually mean here?

Three things, and all three are about the arrangement rather than about the number. First, engaged separately: Palani Valuation Advisors LLP, invented, holds its own engagement with Nilgiri Growth Partners Fund II, invented, rather than working as part of the manager. Second, answerable separately: it answers for its own work under that engagement, and the manager cannot answer for it. Third, signing separately: Rohit Vaz signs the annual valuation report in his own name at his own firm, and that signature is not the manager's signature and not the auditor's signature either.

Read those three again and notice that not one of them makes any claim about the figure itself. They are claims about who was engaged, who answers and who signed. Engagement, answerability and signature are the whole content of the word, and the word is worth more than it sounds. A figure with a separate name attached to it is a figure somebody can be asked about. The word also carries less than most readers assume.

And what does independent not mean?

Independent does not mean a price. A price is made when two parties transact, and no transaction has happened in any of these five holdings. A value is an estimate of what a holding would change hands for between willing partiesThe idea a fair value rests on: a buyer and a seller who both want the transaction and neither of whom has to do it. on the valuation date, formed on a stated basis, by somebody with no buyer in the room. A price and a value are different species of number, and the two are not interchangeable.

Independent does not mean a buyer either. Holding 4 of Nilgiri Growth Partners Fund II, invented, is carried at Rs 1,08,00,00,000 at the end of that fund's Year 9 Quarter 2, and no offer of Rs 1,08,00,00,000 or of any other figure has been made for it by anybody. And it does not mean a promise: nothing in a valuation says what will eventually be received. The gap between an estimate and a receipt is exactly the space in which every misreading on this subject lives.

The clearest illustration this invented fund carries is a single holding that has already been through both states. Holding 3 of Nilgiri Growth Partners Fund II, invented, was carried at 2.00 times its cost at that fund's Year 7 year end and sold at 2.50 times its cost in that fund's Year 8 Quarter 1. Why a private carrying value moves after the information that would move it is covered separately. Holding 3 shows only the plain thing: an estimate and a receipt are two different numbers, and the receipt is the number that arrives in cash.

What does the consent sitting above the valuation policy actually cover?

Nilgiri Growth Partners Fund II, invented, has an investor advisory committeeInvestor representatives who consent on named matters, valuation policy among them. of seven members, drawn from investors 1, 2, 3, 4, 5, 6 and 8, and chaired by Meera Sathe for investor 1. Among the matters that committee consents on is the fund's valuation policyThe written basis on which a fund's holdings are valued, and the timetable for doing it.: the written basis on which holdings are valued and the timetable on which the work happens. The committee's consent is the named answer to the structural conflict set out at the start.

Now the second half, and it is the half most readers skip. The committee consents on the policy; it does not agree any individual valuation, and consenting to a process is not approving the marks produced under it. No member of that committee signed off Rs 1,08,00,00,000 for holding 4. Nobody on it approved Rs 21,00,00,000 for holding 6. The committee agreed the basis and the timetable, and the marks then come out of that machinery without passing back across the members' desks.

A household example makes the distinction unmissable. A residents association agrees the rule that the building will be repainted every four years by a contractor chosen through three written quotes. Agreeing that rule is a consent on a process. Agreeing it is not the same thing as approving the invoice from this year's contractor, and no resident would confuse the two. Someone who says the committee agreed the price because the committee agreed the process has jumped a gap that nobody actually crossed.

Does a higher mark pay the manager more on this fund?

No, and the arithmetic is short enough to hold in the head. The answer belongs to Nilgiri Growth Partners Fund II, invented, on its own contracted terms, and describes no other arrangement. Two lines do it.

Line one, the management fee. From that fund's Year 6 onward the fee is charged on the acquisition cost of holdings not yet realised, measured at the start of each year, and not on what those holdings are marked at. At the start of its Year 9 that cost was Rs 1,80,00,00,000, so the Year 9 charge is Rs 3,60,00,000. Mark the five remaining holdings at Rs 2,82,00,00,000, mark them at Rs 4,23,00,00,000, mark them at anything at all: the acquisition cost does not move, so the fee does not move. Line two, the carried interest. Carried interest is paid out of cash actually distributed, in a contracted order, and Nilgiri Growth Partners Fund II, invented, has paid none to the record date. A mark produces no cash and therefore reaches nothing in that order either.

So on this invented fund a mark moves the reported multiple and the reported rate of return, and it moves nothing at all that the manager is paid. Notice what that does and does not settle. The arithmetic settles one specific question on one specific set of contracted terms. The same arithmetic says nothing about an arrangement whose fee is charged on net assets rather than on cost. There the same question would have a different answer, and that difference is the reason the question is worth asking rather than assuming. How the fee itself is built and how the payment order works are both covered separately; they are named here only because this one answer depends on them.

What does a valuation report give a reader that the manager's own mark does not?

The part that does not change is the surprising part, so begin there. Both figures feed the same addition. Kolar Fund Services Private Limited, invented, does not treat a holding value from Palani Valuation Advisors LLP, invented, differently from a mark made by the manager. Both are simply what is currently attached to that holding, and both get added into the net asset value in exactly the same way. There is no second column on the statement, no asterisk and no different arithmetic. The difference between the two is not in the sum; it is in who is answerable for the figure that went into it.

The annual valuation report adds a separate name, a separate firm and a separate signature, on a stated basis, for a stated date. A reader then has something concrete to pursue. The basis used can be asked for. So can the date the work was as at, and the name of whoever signed it. On this invented fund the signatory is Rohit Vaz at Palani Valuation Advisors LLP, invented. None of that establishes that the figure is correct. All of it establishes that the figure has an author who can be asked.

Given an hour with a private fund's valuation arrangement, what should be asked?

The practical end of the matter is where the split between three parties stops being tidy furniture and starts being useful. The people who do this for a living are monitoring analysts: somebody inside a fund of funds, a bank treasury team, the small team that watches external managers for a pension pool. Nilgiri Growth Partners Fund II, invented, has all three among its twelve investors. None of them can verify a mark, and none of them tries to. Instead they establish, for every figure in front of them, who made it, on what basis, as at when, and whether anything the manager is paid moves with it.

All four are worth turning into questions that can be asked out loud, together with a fifth that people forget. Every answer below is the one this invented arrangement gives, and not the answer any other arrangement would give.

Notice that not one of those five questions asks whether a mark is right. Whether a mark is right has no answer available to a reader, and pursuing it is how an hour gets wasted. The five that do have answers are all questions about the arrangement, and a document can settle that kind of question. An analyst who can answer all five knows precisely what they are holding. An analyst who can answer none of them is holding a rupee figure and a feeling.