Valuation Marks and Fair Value Policy
A private company has no daily stock price, so its owner has to estimate its value every quarter using a formal fair value policy — a process that is far more judgment-dependent than reading a price off an exchange, and that investors rely on without being able to independently check it in real time.
Prerequisites: GP/LP Fund Structures and Commitments
A public stock has a price you can look up in seconds. A private company held inside a private equity or venture fund has no such thing — nobody trades it every day, so there's no market price to simply read off. Instead, the fund's manager must produce a fair value estimate, typically every quarter, using accepted valuation methods: comparing the company to similar public companies' trading multiples, looking at recent private transactions in similar businesses, or building a discounted cash flow model. These marks become the reported net asset value (NAV) investors see on their statements, and they are estimates made largely by the same people who benefit from the fund looking good.
Why this needs a formal process
Because the manager both produces the valuation and has an incentive (fees based on NAV, reputation, fundraising) for that valuation to look strong, funds are expected to run a fair value policy: a documented, consistent methodology applied the same way every quarter, reviewed by an internal valuation committee, and in many cases checked by an independent third-party valuation firm at least annually. Under accounting rules like ASC 820, valuations are also categorized by how directly observable their inputs are — a recent arm's-length transaction in the exact same company is far more reliable evidence than a model built on assumed growth rates and a comparable-company multiple pulled from a different sector.
What this means in practice
An investor reading a fund's reported NAV is trusting a process, not a market price, and the quality of that process varies enormously across managers — some update marks promptly on real news (a competitor's down round, a missed milestone), others leave a company's mark unchanged for multiple quarters purely because no new financing event forced a re-look. This gap between a formal-sounding fair value process and an actual, timely, arm's-length market price is the root cause of the smoothing problem described in Stale Marks and Understated Volatility.
A private asset's reported value is an estimate produced under a formal policy, not an observed market price — and the same investor relying on it usually has no independent way to check it between the manager's own quarterly valuation cycles.
Treating a private fund's quarterly NAV as equivalent in reliability to a public stock's closing price is a common and consequential mistake. The NAV reflects a manager's own valuation judgment, applied on a lag, and is only as trustworthy as the rigor and independence of the process that produced it.
Related concepts
Practice in interviews
Further reading
- FASB, Accounting Standards Codification 820, Fair Value Measurement