boltKey takeaways
- Fair value is the price a market participant would pay for the investment at the measurement date, not what the GP thinks it will be worth at exit.
- Most private holdings are Level 3 assets valued with a market approach, an income approach or a recent transaction, ideally cross-checked against each other.
- Calibration links today's mark to the entry price: start from the inputs implied by the deal and update them for changes in the company and the market.
- A defensible process separates preparers from approvers, follows a written policy, and keeps the evidence for every key input.
- Consistency over time matters as much as any single mark; changes in method should be rare, deliberate and explained.
Portfolio valuation is the process a private fund uses to estimate the fair value of each investment it holds at a reporting date, usually quarter end. Because most holdings have no quoted price, the GP must estimate what a market participant would pay for each position using recognized methods, evidence and judgment, then have those estimates reviewed and approved. The results drive the fund's NAV, every LP's capital account, performance metrics and, in many funds, fees and carry.
A defensible process is one where a reasonable outsider, such as an auditor, an LP or a regulator, can follow how each number was reached and would conclude the approach was consistent and well supported. This article explains the framework, the main methods, and how to run the quarter.
The fair value standard#
Under U.S. GAAP, ASC 820 defines fair value as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Three implications shape everything that follows:
- It is an exit price, not the GP's view of long-term intrinsic value or the expected exit multiple years from now.
- It is a market participant view. Assumptions should be ones a buyer of the position would make, not ones unique to the current owner.
- It is measured today. Market conditions at the reporting date count, even if the fund has no plans to sell.
ASC 820 also establishes the fair value hierarchy. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 are other observable inputs; Level 3 are unobservable inputs. Nearly all private company equity and much private credit is Level 3, which brings additional disclosure requirements and more audit attention.
Outside the U.S., IFRS 13 uses a substantially similar definition. Many managers also follow the International Private Equity and Venture Capital (IPEV) Valuation Guidelines, and U.S. practitioners frequently refer to the AICPA's accounting and valuation guide for portfolio company investments of venture capital and private equity funds.
The main valuation methods#
| Method | How it works | Works best for | Watch out for |
|---|---|---|---|
| Recent transaction price | Uses the price of a recent round or acquisition of the same or similar instrument | Early-stage companies shortly after a priced round | Goes stale; must be tested for changes since the transaction |
| Market multiples | Applies EV/revenue or EV/EBITDA multiples from comparable public companies or deals to the company's metrics | Revenue-generating or profitable companies | Choice of comparables; adjustments for size, growth and liquidity |
| Discounted cash flow | Discounts projected free cash flows at a risk-adjusted rate | Companies with reliable projections; credit investments | Sensitivity to discount rate and terminal value; optimistic forecasts |
| Yield or discount rate analysis | Values a loan by comparing its yield to current market yields for similar risk | Private credit | Credit deterioration not captured by spread alone |
| Net assets | Values the business on the fair value of its underlying assets | Holding companies, real assets, liquidating businesses | Not suitable for going concerns with intangible value |
| Option pricing or scenario methods | Allocates enterprise value across share classes with different rights | Venture companies with multiple preferred classes | Complexity; inputs such as volatility and time to exit |
In practice, a well-supported valuation usually uses a primary method and at least one secondary method as a reasonableness check. When they disagree materially, the explanation is often the most informative part of the memo.
Enterprise value to equity value#
Most methods produce an enterprise value. To get to the fund's position, subtract debt and debt-like items, add excess cash, then allocate the resulting equity value across the capital structure, taking into account liquidation preferences, conversion rights and participation. For venture investments in companies with several preferred series, the allocation step can matter as much as the enterprise value itself.
Calibration#
Calibration is the practice of using the price paid at entry to anchor later valuations. At acquisition, the transaction price is presumed to be fair value. The analyst backs out the implied inputs, for example an EV/EBITDA multiple of 11x when comparables trade at 13x, and then carries that relationship forward. At later dates, the mark is updated for changes in the company's performance and in market multiples, while preserving the calibrated discount or premium unless there is a reason to change it.
Worked example#
Assume a hypothetical fund buys a company for an enterprise value of $220M when its trailing EBITDA is $20M, implying 11.0x. Comparable public companies trade at a median of 13.0x, so the deal was priced at about a 15% discount to peers.
A year later:
| Input | Entry | Current |
|---|---|---|
| Company EBITDA | 20.0M | 23.0M |
| Peer median EV/EBITDA | 13.0x | 12.0x |
| Calibrated discount to peers | 15.4% | 15.4% |
| Applied multiple | 11.0x | 10.15x |
| Enterprise value | 220.0M | 233.5M |
| Net debt | 90.0M | 80.0M |
| Equity value | 130.0M | 153.5M |
Equity value rises about 18% even though peer multiples fell, because EBITDA grew 15% and net debt fell. Each movement is attributable to an identifiable driver, which is what auditors and LPs want to see. If the reviewer believed the discount to peers should narrow, for instance because the company had resolved an issue that justified the original discount, that change would be documented separately.
Running the quarter#
A repeatable cycle keeps the process consistent and the timetable predictable:
- Gather inputs. Portfolio company financials, budgets, cap tables, debt schedules and any transaction activity.
- Update market data. Comparable company multiples, precedent transactions, yield curves and credit spreads as of the measurement date.
- Prepare valuation memos. One per investment, showing method, inputs, calculations, calibration, cross-checks and a short narrative of what changed.
- Independent review. Finance or a valuation team that did not source the deal challenges the deal team's inputs. Some funds also use a third-party valuation firm for some or all positions.
- Valuation committee approval. Committee reviews significant marks, changes in methodology and outliers, then approves the final values with minutes.
- Post to the ledger. Approved values are booked to the general ledger and flow into NAV, the schedule of investments and partner capital accounts.
- Back-test. When an investment is sold, compare the exit price with recent marks and record what the process missed or got right.
Step 7 is underused. A pattern of exits well above or well below the prior quarter's marks tells you something about the process that no single memo can.
Governance and documentation#
The method matters less than whether it was applied consistently and evidenced. The core governance elements are usually set out in the fund's valuation policy:
- Segregation of duties. Deal teams provide information but do not have the final word on their own marks.
- Documented rationale. Each significant judgment, including choice of comparables, adjustments and probability weights, is written down with its source.
- Consistency. The same method is used from period to period unless there is a clear reason to change, and changes are disclosed.
- Evidence retention. Inputs are saved as they existed at the measurement date so the mark can be reproduced later.
- Escalation. Clear triggers, such as a covenant breach, a down round or a missed plan, that require a fresh look rather than a rolled-forward mark.
Auditors will test a sample of valuations, often with their own valuation specialists; see fund audits for what that involves. Registered investment advisers should also expect valuation to feature in SEC examinations, since inconsistent or unsupported marks can affect fees, performance claims and investor communications.
Common weaknesses#
- Holding at cost too long. Cost can be a reasonable starting point shortly after an investment, but it must be tested each period against developments at the company and in the market.
- Selective comparables. Changing the peer set when it produces a lower number but not when it produces a higher one.
- Relying on the last round. A new round led by insiders, or one with unusual terms, may not be strong evidence of fair value for the fund's class of shares.
- Ignoring the capital structure. Applying a headline post-money valuation to every share class regardless of preferences.
- No narrative. A spreadsheet with no explanation of why the inputs moved is hard to defend a year later.
How Privatis helps#
Privatis records portfolio valuations per investment and quarter, carries approved marks into NAV and the fund general ledger, and reflects them in partner capital accounts and investor reports. Valuation history is retained with an audit trail of every change, so the support for any reported mark, and who approved it, can be found later.