Release date
10 October 2022
By By Alkis Hajittofis – Executive Director and Head of Portfolio Management, Resolute Investment Management (Cyprus) Ltd, and Stephanie Stavrides – Head of Deals, Strategy and Sustainability, Nexia Poyiadjis
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Independence and specialist skills: Why use an independent valuer in Funds

Independence and specialist skills: Why use an independent valuer in Funds

The valuation of an Alternative Investment Fund (‘AIF’ or ‘Fund') is of great importance to investors and service providers alike, therefore its preparation should be performed impartially, and with due skill, care, and diligence on a consistent basis across periods.

A valuation provides the basis of information included in periodic reports to investors which highlight the performance of the Fund and Net Asset Value per Share (‘NAVPS’) or units. Counterparties also use the valuation for a variety of reasons including reporting to investors and regulators, and calculating their own remuneration, where applicable.

Whilst an AIF Manager (‘AIFM’) can perform the valuation in-house, subject to meeting certain organisational requirements, many choose to delegate the function to an independent external valuer. An external valuer allows the AIFM to access specialist knowledge (e.g., asset class, industry, or geography specific) whilst ensuring independence of the valuation function.

Who can perform the Valuation?

The AIFM Directive (‘AIFMD') states that the valuation function may be carried out either by an external valuer or the AIFM itself.

Where the AIFM performs this function, the valuation process must be conducted independently from the portfolio management function. Any conflicts of interest must be appropriately mitigated, with adequate consideration given to ensure the appropriate remuneration structure is in place for individuals carrying out the function.

An external valuer may be appointed to carry out the valuation function, provided they are independent from the AIF, the AIFM and any other person with close links to the AIF or AIFM. The external valuer must be professionally recognised and must be in a position to offer professional guarantees in writing, confirming their qualification and capability to perform the function in accordance with the AIFMD and local law requirements.

It is important to note that the external valuer may not delegate the valuation function to a third party.

Despite any delegation to an external valuer, the AIFM remains ultimately responsible for the valuation of AIF assets and, although the external valuer will be held liable to the AIFM for losses caused by its negligence or intentional failure to perform its task, proper care and consideration must be exercised by the AIFM when choosing to whom to delegate this function.

The AIFM must be confident that the valuer is not only qualified to undertake this function but has the experience, capacity and expertise to value the assets of a specific AIF (e.g., the geographic location or the nature and complexity of the underlying assets).

Valuation Policies and Procedures

An AIFM is required to establish and review, on a periodic basis, written policies and procedures for each AIF it manages. These include policies and procedures to:

  •  identify, prevent, monitor, manage and disclose potential conflicts of interest when appointing external valuers, such as a conflicts of interest policy,
  • validate a model before its initial use, such as appointing an internal or external individual (e.g., auditor) who is not involved in the process to review the model,
  • predetermine the process for any changes in valuation policies and procedures or methodology used, and
  • frequency of periodic reviews of policies, procedures and methodologies used, (i.e., annually or before the AIF engages in a new investment strategy or invests in a new type of asset).

Robust policies and procedures are required to ensure that any potential errors in the valuation process are detected and mitigated in a timely manner, ensuring the reasonableness and continued relevance of the final valuation performed.

Valuation methodology

The valuation must be performed impartially and with all due skill, care and diligence. In addition to disclosing the NAVPS of the AIF to the investors, all procedures and methodologies used to conduct the valuation must be fully documented in the Prospectus.

For example, if a model is used to value the assets of an AIF, the model and its main features shall be explained and justified in the valuation policies and procedures. This includes proper documentation of:

  • the reason for the choice of the model,
  • the underlying data,
  • the assumptions used in the model and the rationale for using them, and
  • the limitations of the model-based valuation.

While the AIFMD does not prescribe the methodologies to be used for valuing assets, the methodology used in each circumstance should depend on the nature of the underlying asset, and the reasoning behind choosing a particular methodology explained accordingly. Generally, a valuer will use a combination of the Asset Approach, Income Approach and Market Approach, the choice of which will depend on the nature and liquidity of the underlying assets.

Although consistency with prior years is important in presenting a useful comparison for investors year on year, in certain instances a change in methodology may be required. This will depend on various factors, including but not limited to any change in the nature of the underlying asset being valued. Any deviation from consistency should be explained and justified, while further disclosures may be required under IFRS for Audit purposes.

 When a valuation should be conducted

Assets must be valued at least once a year, and on an ad-hoc basis in the case of an issue, subscription, redemption, or cancellation of units or shares.

If the AIF is open-ended, such valuations and calculations shall be carried out at a frequency which is both appropriate to the assets held by the AIF and the frequency with which it issues and redeems shares/units.

If the AIF is closed-ended, such valuations and calculations shall be carried out in the event of an increase or decrease of the capital of the relevant AIF.

Oversight and confirmation of the final draft  

As previously mentioned, the AIFM retains the ultimate responsibility for a valuation, therefore oversight is required. On commencement of the valuation the AIFM’s portfolio management function will provide required information on the portfolio to the valuer to allow them to perform their task. Exchange of information includes information such as the structure of investments, financial information such as results and forecasts and commentary on market outlook. These are all combined with the valuer’s own research.

Throughout the valuation the AIFM’s various control functions will oversee the progress. The risk management function will monitor the work performed by external valuers and review and where necessary, challenge and complement the valuer’s work with additional independent analyses. Regardless of the fact that the risk management function relies, to a certain extent, on the output of other functions, the responsibility to cover the whole risk management cycle remains intact.

Additional supervision and oversight are provided by the AIFM’s compliance and internal audit functions, which ensure the valuation has been performed in accordance with the provisions of the AIFMD and based on the valuation procedures and principles of the AIFs under management. External validation comes from the Depository who is responsible for ensuring that the value of the units or shares of the AIF is calculated in accordance with the applicable national law, the Investor documents for each AIF.

Final review will be conducted the AIFM’s control functions, with portfolio management reviewing to confirm factual accuracy of the report. Upon completion of the review, the valuer will proceed with the final sign off.


The importance of a robust valuation process and function cannot be underestimated. The AIFM’s responsibility towards the unitholders, both legal and ethical, safeguards investors and ensures the reliability they can place on the performance of their investments. As such, an AIFM must mitigate against any conflicts of interest, perceived or actual, which is easily achieved through delegating to a well-regarded and experienced professional valuer.

Whether the AIFM chooses to delegate the valuation function or not, it must always follow developments in the requirements under the AIFMD and other prevailing legislation. Maintaining a strong grasp of regulatory requirements, ensuring understanding of the valuation function, and the work being performed by the expert valuers will enable the AIFM to maintain effective control of the management of the AIF.

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