A private company’s last financing price can be precise to the cent and still be the wrong answer for the fund’s current valuation.
The round may be eighteen months old. The company may have missed its forecast, issued a new class with different rights, raised bridge debt, lost a major customer, or received an acquisition offer. A convertible instrument may not share the economics of the preferred stock. A secondary trade may involve a small block sold under pressure.
A private fund valuation policy must create a disciplined way to interpret those facts. It should define who prepares and approves valuations, which methods are appropriate, how conflicts are handled, and what evidence supports a change or decision not to change. It should not turn a judgment into a formula that ignores the asset.
The policy must fit the instruments the fund will hold
Generic valuation language often says that the manager will determine fair value in good faith using methods it considers appropriate. That authority may belong in a governing document, but it does not tell the finance team how to value a seed preferred round, venture debt with warrants, a token subject to transfer restrictions, a distressed loan, or an interest in another private fund.
The policy should identify the expected asset types and the methodologies that may be relevant to each. Those can include a recent transaction, market or guideline-company multiples, discounted cash flow, scenario analysis, net assets, expected recovery, option-pricing or probability-weighted methods, and other techniques appropriate to the investment.
It should also address the inputs that make those methods credible: current financial statements, capitalization data, forecasts, cash runway, financing terms, market conditions, customer concentration, legal claims, product milestones, and observable transactions.
The International Private Equity and Venture Capital Valuation Guidelines were updated in December 2025 and describe current best-practice recommendations for reporting private capital investments at fair value. The IPEV Guidelines are not law or a substitute for applicable accounting standards. They are a useful discipline for managers that need a method capable of being explained to investors, administrators, and auditors.
Begin with calibration, then update for current facts
At acquisition, the transaction price may provide strong evidence of fair value. Calibration asks which inputs and assumptions cause the chosen valuation technique to reproduce that price at the initial measurement date. Later valuations can then update those inputs for company performance, market changes, instrument rights, and new information.
This approach is more informative than carrying an investment at cost until an obvious event occurs. Cost may remain a reasonable estimate for a period, but the policy should require the manager to test that conclusion. The absence of a new financing round is not evidence that nothing changed.
Calibration also reduces arbitrary method changes. If the manager valued an investment using revenue multiples when it bought the company, switching to a different metric after performance deteriorates requires an explanation. A new method may be appropriate as the business matures or information improves. The record should show why it produces a better current estimate.
A financing round is evidence, not an automatic mark
New financing can be highly relevant because informed parties negotiated a current transaction. The price still needs analysis.
The round may be led by an existing investor, include strategic considerations, or represent a rescue financing. New securities may carry liquidation preferences, participation rights, dividends, redemption rights, antidilution protection, governance rights, or seniority that the fund’s existing security does not have. The total announced round may include a secondary component or commitments that have not funded.
The manager should assess whether the transaction was orderly, whether the investor was independent, what rights attach to each class, and whether the price implies the same value for the fund’s instrument. A backsolve or option-based allocation may be useful in some capital structures; in others, a scenario or simpler rights analysis may be more appropriate.
The reverse is also true. An internal bridge round at a flat price does not necessarily prove that fair value is unchanged. It may buy time without resolving a decline in enterprise value.
Negative evidence needs a defined escalation path
Valuation problems often arise from stale information rather than a lack of methodology. The policy should identify events that prompt review outside the normal quarter-end cycle or require escalation to the valuation committee.
Potential indicators include a missed financing, material forecast variance, loss of a customer or license, litigation, regulatory action, covenant breach, default, down round, distressed secondary sale, management departure, cybersecurity incident, product failure, insolvency concern, or adverse change in the market for comparable companies.
Not every event requires a markdown. It does require consideration. The valuation package should show what occurred, which assumptions it affects, what additional information was requested, and why the committee concluded that a change was or was not appropriate.
Positive events deserve the same discipline. A nonbinding acquisition indication, unsigned customer contract, or preliminary financing discussion may not justify an immediate increase. The policy should prevent optimism from receiving a lower evidence threshold than impairment.
Valuation governance should expose the manager’s conflict
Valuations can influence reported performance, fundraising, management fees, carried interest, redemptions, transfers, and transactions among affiliated vehicles. The manager may therefore benefit from a higher or lower mark in different settings.
The policy should identify those conflicts rather than imply that a committee eliminates them. It can require members to disclose personal or deal-specific interests, separate preparation from approval where staffing permits, obtain administrator or third-party input, and escalate transactions involving affiliates or compensation.
A typical governance record may identify:
- the person responsible for preparing the valuation;
- the data and valuation date used;
- the methodology and material assumptions;
- the prior-period value and reason for change;
- any range considered and the selected point;
- conflicts and recusals;
- administrator, auditor, or third-party comments;
- overrides or exceptions from policy; and
- committee approval and follow-up items.
An external valuation specialist can add expertise or independence, but the manager should understand the work performed, evaluate assumptions, and retain responsibility assigned by the fund documents and applicable standards. Outsourcing the calculation does not outsource the judgment.
Different securities in the same company may have different values
A portfolio company’s headline valuation is not the same as the value of every instrument in its capitalization table. Preferred stock, common stock, debt, warrants, options, simple agreements for future equity, convertible notes, and tokens can have different rights, risk, and liquidity.
The policy should require security-level analysis where those differences are material. A $100 million post-money financing does not automatically mean that ten percent of common stock is worth $10 million. Liquidation preferences, conversion rights, dilution, control terms, and expected exit scenarios may change the result.
Restrictions also matter. Transfer limitations, lockups, lack of a market, information rights, and jurisdictional constraints can affect the analysis depending on the applicable valuation framework. The manager should avoid applying a standard “illiquidity discount” without showing why the adjustment fits the instrument and measurement objective.
Reporting should reconcile the number to the narrative
An LP may see valuations in capital-account statements, quarterly reports, the track record, the DDQ, fundraising materials, and financial statements. Those presentations may use different dates or conventions, but the manager should be able to reconcile them.
If a deck uses a valuation updated after the most recent audited financials, it should identify the date and basis. If gross and net performance depend on the mark, the calculation file should preserve the exact value used. If the manager overrides an administrator’s proposed treatment, the reason should be recorded.
The SEC’s 2022 private fund adviser examination observations included concerns about misleading track records and inaccurate calculations. Its fiscal year 2026 examination priorities identify valuation, fees, disclosures, conflicts, and illiquid assets among areas relevant to certain adviser examinations. These materials do not prescribe one valuation method for every private asset. They reinforce the need for disclosures and records to match the process used.
Test the policy with difficult facts before adopting it
A policy can look complete until the manager applies it to a real portfolio. Before approval, the team should run several assets through the proposed process: a recent priced round with senior preferences, a company held at cost for more than a year, a bridge note, an underperforming company, and a position with a recent secondary indication.
That exercise reveals whether the policy requires information the manager cannot obtain, assigns decisions to a committee that does not meet, or uses methods the team cannot explain. It also gives the administrator and auditor an opportunity to identify mismatched assumptions before year-end.
The test should include timing. Who collects company data? What happens when information arrives after the reporting deadline? Who can approve a provisional value? When is an out-of-cycle change permitted? How does the manager correct an error already reported to investors?
An operable policy makes those decisions before the reporting calendar applies pressure.
A credible mark is supported judgment, not claimed certainty
Illiquid asset valuation will always involve estimation. Institutional investors generally understand that the eventual exit price may differ. They still expect a manager to use a consistent framework, respond to current evidence, control conflicts, and preserve the basis for material judgments.
A policy that does that improves more than financial reporting. It supports fee calculations, performance presentations, conflicts review, transaction pricing, and the manager’s credibility when an LP asks why a value changed.
Veritas Global advises private fund sponsors on valuation provisions, policies, committee governance, conflicts, and consistency across reporting and marketing materials. If your fund’s assets have outgrown a cost-based or template policy, contact us to review the legal and operational framework.
Disclaimer: This article is provided for general informational purposes only and does not constitute legal, tax, accounting, valuation, investment, or other professional advice. It does not create an attorney-client relationship. Laws, regulations, accounting standards, guidance, and market practices may change, and their application depends on specific facts and circumstances. Readers should consult qualified advisers before acting.
