High-profile frauds and a serious economic downturn have led investors to rethink their asset allocations and strive for additional transparency for illiquid or less-transparent investments, some of which previously may have been considered “liquid.”
The introduction of Financial Accounting Standards Board Standard 157 (now Accounting Standard Codification Topic 820), which became effective in 2007, put fair value accounting on investors’ radar just as the financial crisis catapulted fair value accounting into the center of a media firestorm that alleged at times that the controversial accounting standard was a root cause of the Great Recession.
Whether fair value accounting contributed to the alternative asset industry’s challenges over the past two years will be debated for some time. But all signs indicate that fair value accounting is here to stay, and pending regulations are likely to reinforce its continued presence.
Accordingly, investment managers and investors are facing new realities, some of which have direct financial impacts (e.g., valuation) and some of which have indirect impacts (e.g., operations and policies). As a result, investors and investment managers must deal with yet another series of highly complicated issues.
The investors' perspective
As the pendulum of power has shifted from the investment manager to the limited partner, the new mantra for investors in alternative assets has become “Trust, but verify.” Gone are the days of investors limiting their diligence process because they feel fortunate to have been granted the privilege of investing in someone’s fund.
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