boltKey takeaways
- A valuation policy is the written rulebook for how a fund determines fair value: who decides, which methods apply, how often, and what evidence is kept.
- Its most important job is consistency: the same kinds of investments valued the same way every period, with deliberate, documented exceptions.
- Governance sections, especially a valuation committee and separation from deal teams, matter as much as the methodology sections.
- Registered advisers must have written compliance policies reasonably designed to prevent violations, and the SEC treats valuation as a core area.
- Review the policy at least annually and test it against what the team actually does; a policy that is not followed is worse than none.
A fund valuation policy is the written document that sets out how a private fund determines the fair value of its investments: who is responsible, which methods are used for each type of asset, how often values are updated, how conflicts are managed, and what documentation supports each mark. It turns valuation from a series of individual judgments into a repeatable process that auditors, LPs and regulators can evaluate.
Every fund that reports at fair value needs one, and its quality is visible to outsiders: LPs request it in due diligence, auditors test against it, and SEC examiners for registered advisers frequently ask for it early in an exam.
Why a written policy matters#
Valuations in private funds are estimates built on judgment. They also drive real money: NAV, LP capital accounts, reported performance, and in many funds management fees and carried interest. That combination of judgment and economic consequence is why outsiders want to see the rules written down.
A good policy delivers:
- Consistency across investments, periods and people.
- Accountability, through defined roles and approvals.
- Defensibility, because each mark can be traced to a documented method and approved inputs.
- Conflict management, since the people who benefit from higher marks are not the ones who finalize them.
- Efficiency, since a clear policy shortens audit fieldwork and LP diligence.
The regulatory and accounting backdrop#
For funds reporting under U.S. GAAP, fair value is defined by ASC 820 and investment companies follow ASC 946. The policy should apply these standards, not restate them.
For SEC-registered investment advisers, Rule 206(4)-7 under the Advisers Act requires written policies and procedures reasonably designed to prevent violations of the Act, and the SEC's adopting release for that rule identified processes to value client holdings as an area those policies should address. Valuation has been a recurring topic in SEC examinations of private fund advisers, particularly where marks affect fees or are used in marketing.
The SEC's 2023 Private Fund Adviser Rules, which included quarterly statement and other reporting requirements, were vacated by the Fifth Circuit in June 2024. The compliance rule, the fiduciary duty and the antifraud provisions continue to apply. Rule 2a-5 under the Investment Company Act sets valuation requirements for registered funds; it does not apply to private funds directly, though some managers borrow from its structure. Exempt reporting advisers and unregistered managers are not subject to Rule 206(4)-7, but LPs and auditors expect a comparable policy regardless. For more on these regimes, see registered investment advisers and compliance.
What a valuation policy should contain#
There is no mandated template, but well-built policies cover the same ground.
| Section | What it should establish |
|---|---|
| Purpose and scope | Which funds, vehicles and asset types the policy covers, and the accounting framework applied |
| Roles and governance | The valuation committee's membership, quorum, voting and authority; responsibilities of deal teams, finance and compliance |
| Valuation frequency | Measurement dates, such as quarterly, plus triggers for interim valuation |
| Methodologies | Approved methods by asset type, primary and secondary methods, and how to choose among them |
| Inputs and sources | Approved market data sources, how comparables are selected, and how portfolio company data is obtained |
| Calibration | How entry prices are used to anchor subsequent valuations |
| Third-party valuation | When independent valuation firms are used, their role, and how their work is reviewed |
| Overrides and exceptions | Who can depart from the standard approach, how it is approved and documented |
| Conflicts of interest | How conflicts are identified and managed, for example where marks affect fees or a fundraising is underway |
| Documentation and retention | What must be kept for each valuation and for how long |
| Back-testing and review | Comparison of exit prices with prior marks; periodic policy review |
| Reporting | How valuations are communicated to LPs, the advisory committee and lenders |
Governance#
The valuation committee is usually the heart of the policy. Typical features include members from finance, compliance and senior investment staff; a rule that deal team members can present but not vote on their own investments; minutes recording what was discussed and decided; and escalation to the LP advisory committee where the LPA requires it, for example on certain conflicted valuations.
Methodologies#
Rather than prescribe a single method, the policy should set out which methods are appropriate for which situations, such as recent transactions for early-stage companies, multiples for revenue-generating companies, and yield analysis for loans, and require a secondary method as a cross-check where practical. The portfolio valuation article walks through these methods and a calibration example.
Triggers for re-valuation#
List events that require a fresh valuation rather than a roll-forward: a new financing round, a covenant breach, a missed plan, a material change in market multiples, an offer to acquire, a key customer loss, or a significant event in the company's sector.
Conflicts#
Spell out situations where the adviser's interest may diverge from the fund's: NAV-based fees, accrued carry, a fundraising for a successor fund that will cite the current fund's performance, a NAV facility with an LTV covenant, or a cross-fund transaction such as a continuation vehicle. The policy should say how each is handled, which may mean independent valuation support or advisory committee review.
A worked illustration: why consistency matters#
Assume a hypothetical fund holds two similar software companies, both acquired at about 8x revenue. In a quarter when public software multiples fall 25%:
| Company A | Company B | |
|---|---|---|
| Method used | Revenue multiple, updated | Held at last round price |
| Revenue growth since entry | 20% | 20% |
| Resulting change in value | about -10% | 0% |
Both approaches might be individually defensible in isolation, but applying different approaches to similar assets in the same period, without a documented reason, is exactly what auditors and examiners look for. The change for Company A reflects roughly 1.20 × 0.75 = 0.90 of entry value. A policy that requires market-based cross-checks on all revenue-generating companies, and documented rationale when a recent round is relied on, prevents this inconsistency.
How to write or refresh a policy#
- Inventory the portfolio. List asset types, structures and jurisdictions the policy must cover, including any credit, fund interests or real assets.
- Document current practice. Interview finance and deal teams about what they actually do today, including informal habits.
- Draft against the standards. Align methods and definitions with ASC 820 or IFRS 13 and, if used, the IPEV Valuation Guidelines.
- Design governance. Define the committee, voting rules, escalation and documentation.
- Test with real cases. Run the draft against last quarter's valuations. Where practice and the policy diverge, decide which to change.
- Review with stakeholders. Get input from auditors and counsel; consider whether the LP advisory committee should be informed.
- Adopt and train. Formally approve the policy and walk deal teams through what it requires of them.
- Monitor and review. Assess compliance during each cycle and review the policy at least annually, or when strategy or regulation changes.
Common gaps#
- Generic language that does not match the fund's actual assets or process.
- No conflict section, or one that ignores fee and carry effects.
- Unclear authority, leaving it ambiguous who can override a model output.
- No back-testing, so the policy never learns from exits.
- Stale policies that describe a process the team abandoned years ago.
A policy only protects the fund if it is followed. If it describes a quarterly committee with documented minutes, the minutes need to exist. Confirm how the policy interacts with your specific regulatory obligations with counsel.
How Privatis helps#
Privatis supports the operating side of a valuation policy: portfolio valuations are recorded per investment and period, carried into NAV and the fund general ledger, and reflected in capital account statements and investor reports. The audit trail captures every valuation change and who made it, and the compliance filings calendar and DDQ responses help keep policy-related obligations and LP answers consistent.