Blackstone scoffs at industry's reluctance to embrace new valuation standards

Ken Whitney, a senior managing director at private equity giant Blackstone, is not worried that new valuation standards increase the volatility of his funds, thereby scaring off investors.

“This is an economic reality of our business,” he said in a private interview. “As this asset class matures and becomes a more significant part of institutional investors'
portfolios, it makes complete sense that this is what we should be doing.”

The valuation standards, which I have written about in previous postings, would require private equity managers to update the value of assets in their funds on a periodic basis. Traditionally, valuations were performed only at the opening and closing of a fund. Asset prices therefore never changed from their purchase price until a private equity fund closed, giving the asset a stable valuation. The new standards encourage a ‘mark to market’ approach, whereby managers continually update the value of the assets in their funds based on market conditions.

Some managers have complained that the market to market approach will import volatility into their funds as market conditions alter asset values. But institutional investors, with a fiduciary duty to protect the value of their constituents’ money, are requiring funds to keep better records of their portfolio values. Hence, the recent push by different groups in the private equity world – including cooperating firms like Blackstone and accounting houses like KPMG – to standardize valuation methods.

“I believe the fund managers that resist it are being very short-sighted,” said Whitney, adding that this is a natural step in the maturity of the business. “I also believe that the accounting firms will put more and more pressure on managers to put more realistic valuations on their investments.”