Private Equity Valuation Before and After ASC 820

Abstract

We examine the effect of ASC 820 (formerly SFAS 157) on 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. In a setting where we observe all cash flows over a fund’s lifetime, we show that reported net asset valuations more accurately predict future net distributions following ASC 820, particularly for less experienced fund managers, and for smaller and high-performing funds.

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

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