Private Equity Valuation Before and After ASC 820

Abstract

With $3.4 trillion invested in North America, private equity comprises a large segment of the capital markets. We examine the effect of ASC 820 (formerly known as SFAS 157) on the valuations reported by US private equity funds to their investors. In 2008, the FASB implemented ASC 820 to achieve more consistent measurement and increased transparency in fair value reporting. This new standard clarified the most critical accounting policy for private equity funds, which typically include highly illiquid investments. Exploiting a setting where we can observe all cash flows over a fund’s lifetime, we show that the reported net asset valuations (NAVs) of liquidated private equity funds more accurately predict future net distributions to investors following ASC 820 adoption, particularly for smaller funds, less experienced fund managers, and high-performing funds. Our findings shed light on financial reporting in an opaque industry and suggest that ASC 820’s enhanced fair value guidance improved the information environment in an economically significant cross-section of the financial markets.

Keywords: private equity, NAV, NPV, fair value accounting, ASC 820, SFAS 157

JEL Classification: G1, G10, G30, M4, M41