3 Essential Qualities To Look For In An Independent Valuation Provider
March 5. 2021
Whether seeking valuations or analytics for financial reporting, regulatory, transactional or risk purposes, institutions should look for several key characteristics in their third-party valuations provider.
“First and foremost, the third-party valuation provider must ensure the soundness and defensibility of valuations,” said Christopher Kennedy, Senior Director, SitusAMC Valuation Advisory and Risk Solutions. “A third-party provider must also maintain rigorous internal controls and ensure the security of confidential investment data.”
What’s the best way to achieve these goals? Here are three essential qualities look for in a third-party valuations provider.
1. Valuation providers should have controls in place, as evidenced by a SOC 1 report under SSAE 18 standards.
Look for a valuation provider that maintains appropriate controls around the processing and security of an institution’s data, and internal controls relevant to its financial statements in place. This is an industry best practice and one of the first questions to ask when performing due diligence on a valuation provider.
For example, SitusAMC valuations are powered by leading-edge technology and processes, having successfully completed a SOC 1 Type 2 examination of its analytics-based valuation services, which test operating effectiveness in achieving control objectives. In addition, institutions should request a valuation provider’s documented Business Continuity Plan. “This ensures the firm’s ability to maintain mission-critical support functions during disasters or disruptions such as COVID-19,” Kennedy said.
2. A valuation provider should possess relevant subject matter expertise, specific to the instruments being valued.
Hard-to-value assets or those with limited or no active markets require specialized subject matter expertise in order to effectively apply ASC 820 or IFRS 13 fair value standards. Experts who understand the product structures, have access to applicable market and transaction information, and who are available to discuss and support valuations with clients should be required. “Automated systems like those using matrix-based pricing do not capture idiosyncratic performance risk, especially in times of market dislocation,” said Andrew Taddei, SitusAMC Managing Director and Practice Leader for the Valuation Advisory and Risk Solutions group. Meanwhile, there is no team of expert analysts to apply professional judgment to an institution’s investment valuation, or to discuss results with.
3. Valuations should be derived using transparent methodologies and supportable inputs and assumptions.
Valuations of complex assets with limited liquidity or no active market, such as Level II or Level III assets, receive the greatest scrutiny from investors, auditors, regulators and other stakeholders. Valuation methodologies should be well documented and transparent; inputs and assumptions should be supportable, appropriately market-informed, and available to users of the valuations; and output should be clearly presented and understandable. “So-called ‘black box’ valuations lack the transparency required by informed stakeholders,” Kennedy said. In addition, over-engineered methodologies might be little more than attempts to obfuscate a lack of subject matter expertise or access to market information. Seek valuation experts who provide consistent, replicable valuations that are supportable under scrutiny.
The SitusAMC Valuation Advisory and Risk Solutions group works with institutions of all types, applying technology-enabled methodologies and processes to provide transparent and defensible valuations on the entire spectrum of financial instruments—from whole loans to bonds, derivatives and securitization tranches. At SitusAMC, our valuation experts have decades of experience in the asset classes they value and are always available to discuss results with clients. To learn more about our valuation services, contact ChristopherKennedy@SitusAMC.com.