Fair value measurement by listed private equity funds: Do they capture the fundamentals of investee companies?

We examine whether reported fair values of individual investment assets held by listed private equity (LPE) funds reflect the economic fundamentals of the investees. We exploit the requirement for private companies in the UK to file financial statements. Under the assumption that company financial statements capture relevant information about economic fundamentals, we examine the extent to which the fair value measurements of individual investments recognised and disclosed by LPE funds reflect the fundamentals of investees. Taken together, our results suggest that Level 1 and Level 3 assets reported by LPE funds reflect the financial statement information reported by investees, but to different degrees. Further, our evidence suggests that investors in LPE funds do not discount the discretion used by the LPE funds when valuing investees. Our results suggest that in fair value measurement LPE fund managers use information extending beyond the book value and net income of investee companies, and that the resulting fair value measurements are seen as credible by investors in LPE funds.