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FRM Part II · FRM Exam Part II · Private Markets Investing

A pension plan's investment committee is reviewing a private equity fund-of-one. The plan's risk officer notes that the general partner (GP) values unlisted portfolio companies itself each quarter. Which governance feature would most directly strengthen the independence of these valuations?

An independent valuation committee or third-party valuation agent that reviews the GP's inputs and reports to the advisory board best strengthens independence, because it separates valuation from the party whose fees and carry depend on reported values. Higher carry or less frequent reporting does not remove the conflict of interest.

  1. AAn independent valuation committee or third-party valuation agent that reviews the GP's inputs and reports to the fund's advisory boardCorrect
  2. BIncreasing the GP's carried interest so its incentives align more closely with those of the limited partners
  3. CRequiring the GP to report only annual valuations to reduce the noise from estimates
  4. DUsing the last funding round price for every holding regardless of its age

Explanation

Independence of valuation depends on separating the valuation process from the party that earns fees and carry from the reported values. An independent committee or third-party agent provides this challenge. Higher carry increases the GP's incentive to inflate marks, and annual reporting or stale round prices reduce timeliness and accuracy.

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