Beyond the Mark: Making Private Equity Valuations Defensible

This article is Part 2 of a four-part series on private market valuations, inspired by a recent S&P Global webinar with Peter Alleston, Vishal Badri Mahajan, and Abhinav Tickoo. The series looks at how institutions can navigate the evolving complexity of private credit, private equity, complex capital structures, and structured credit.

In Part 1, Private Credit Valuations Under Pressure: How to Approach Standard Loan Marks, we explored how fair value frameworks, benchmark selection, and credit monitoring are reshaping private credit valuations during market stress.

Private equity valuations are facing similar scrutiny. Market volatility, longer holding periods and limited exit activity are making existing valuation assumptions harder to support. At the same time, regulators, auditors and investors increasingly expect institutions to explain not only the reported value, but also the evidence, judgement and governance behind it. This article considers how investors in direct and fund investments can meet those expectations.

From “A Number” to a Defensible Story

Private equity investments are typically classified as Level 3 assets because they do not have readily observable market prices.  Valuation is therefore less about producing a number in isolation and more about making that number understandable, explainable and defensible.  This rests on two foundations:

• Valuation framework: Clear methodologies, assumptions, and professional judgements supported by relevant market and company evidence.
• Governance: Independent review, challenge, and documentation by valuation committees, boards, and other control functions.

Judgement cannot be eliminated from private equity valuation.  The objective is to make that judgement visible, structured, consistently applied and capable of independent review.  Independent valuation can support this by challenging the methodologies, inputs and assumptions used, and documenting how the fair value conclusion was reached.

Regulators such as the U.K. Financial Conduct Authority, the Australian Prudential Regulation Authority, and the International Association of Insurance Supervisors now treat private market valuations as a core supervisory priority. Fair value affects not just reported performance but also member equity, fees and fundraising, liquidity risk, solvency, and potentially financial stability.

Across jurisdictions, the expectation is consistent: valuations must be timely, transparent, and supported by evidence, with clear accountability, appropriate challenge and effective oversight.  Valuation is therefore no longer simply an accounting exercise but an important part of an institution’s broader governance and risk-management framework.

Smoothing, Market Signals, and Dislocated Conditions

A recurring question for direct private equity is how closely private marks should move with public markets. The answer is not one-for-one.

Private companies are illiquid and typically provide financial and operational information less frequently than listed peers. They may also differ from public benchmarks in size, growth, risk, capital structure and business mix.  Company-specific developments may not align directly with movements in public benchmarks. Still, marks that stay flat despite clear market signals are increasingly hard to defend.

Fair value guidance such as IPEV and IFRS supports a market participant-based assessment of the exit price at the measurement date, regardless of an investor’s intention to sell. The goal is therefore evidence-based responsiveness, not blind mirroring or unjustified smoothing. Valuation teams should explain how changes in the broader market, the relevant sector and the company’s own performance contributed to movements in value.

Calibration as a Bridge

Calibration is an important part of this analysis.  A recent transaction can provide an initial reference point, but it should not simply be carried forward unchanged.  The valuation should reflect changes since the transaction in relevant market multiples, company performance, forecasts, risk and expected exit outcomes.  This provides a structured connection between the original transaction price and the current fair value conclusion.

Valuation During Market Dislocation

This analysis becomes more difficult during geopolitical shocks or a sharp repricing of risk.  Valuation teams need to distinguish between:

• Market-only effects: Benchmarks move but company fundamentals remain intact. Calibration may be more appropriate than importing a full dislocation discount.
• Company-only effects: Company-specific risk rises while broader markets remain stable. Scenario-based discounted cash flow analysis can help avoid overvaluation.
• Combined effects: Both benchmarks and company fundamentals are affected. Bridge analysis helps avoid double-counting the same risk through reductions in both forecast cash flows and market multiples.

Separating market, sector, company and security-specific effects helps reduce the risk of both overvaluation and undervaluation.  Where circumstances change materially, more frequent valuations may be required, supported by updated forecasts and appropriate downside or scenario analysis.

This makes the resulting valuation easier for investment committees, boards, investors and auditors to understand and challenge.

Retail Capital and New Valuation Signals

Private markets are gradually opening to retail investors through new access structures. Retail capital can broaden the investor base and provide additional price signals.  It may also increase investor demand in thematic sectors such as technology and AI or compress perceived illiquidity discounts, potentially pushing valuations above those indicated by underlying fundamentals.

Higher observed prices should not automatically be treated as fair value. Managers should test those prices against cash-flow expectations, risk profiles, comparable benchmarks and the economic rights attached to the securities issued. 

Valuers should also consider the nature of the investors, whether the transaction was orderly and whether strategic or non-price factors influenced the price.  More available price information can support valuation, but it does not remove the need for independent judgement.

Building a Robust Framework for Direct Investments

A defensible valuation framework for direct private equity investments generally rests on three pillars:

• Consistency: Methodologies and assumptions should be applied consistently.  This does not mean assumptions must remain unchanged, but any changes should be supported and explained.
• Triangulation: No single method suits every investment.  Where appropriate, conclusions should be cross-checked using market, income, transaction-based or other relevant approaches.
• Governance: The process should be supported by formal policies, documented responsibilities, independent challenge and clear review and approval arrangements.

In practice, valuation teams combine:

• Market inputs: Comparable companies, transaction data, sector indices, and market and macroeconomic assumptions.
• Company inputs: Financial statements, forecasts, capitalization tables, transaction terms, and exit expectations.

These support methods such as comparable company and transaction analysis, price of recent investment, net asset value, and discounted cash flow analysis.

Allocating Value Across Complex Securities

For companies with multiple share classes and embedded rights, estimating enterprise value is only the first step.  That value must then be allocated between the different securities based on their contractual and economic rights.  Depending on the facts and circumstances, this may require scenario-based or option-based allocation methods.

Relevant terms may include liquidation preferences, conversion and participation rights, seniority and dilution protection. These features can result in materially different values for instruments issued by the same company, meaning that value should not simply be allocated on a pro-rata basis.

A transparent record of the inputs, methodology and allocation logic makes the valuation more useful as a decision-making tool and less dependent on unsupported investment-team assumptions.

Indirect Investments: Looking Beyond Headline NAV

For institutional allocators, the same themes apply to fund investments and limited partner interests. Standards such as IPEV and regulatory guidance emphasize that indirect investments should be measured at fair value, not simply carried at the last reported NAV.

The latest GP-reported NAV is normally the starting point.  Investors should still consider whether it remains reasonable at their own reporting date.  Relevant factors may include subsequent market or company developments, capital calls and distributions, foreign-exchange movements and changes in liquidity or exit expectations.

The same principle applies to co-investments. Although a co-investor may rely on information and valuations provided by the lead investor, it should still reach its own fair value conclusion rather than automatically adopting the reported mark.

Three Areas of Independent Review

Limited partners are increasingly seeking independent validation of general partner (GP) marks in three areas:

• NAV integrity: Is the NAV calculated on an appropriate and consistent basis, including the treatment of fees, carried interest, fund expenses, capital activity and other assets and liabilities?
• Process and governance: Does the GP have a clear valuation policy, appropriate controls over management influence and sufficient oversight of underlying investments?
• Analytical checks: Are valuation movements consistent with company performance, relevant benchmarks and available transaction evidence?

Why an Audited NAV May Still Require Review

An audited NAV provides comfort, but it does not automatically remove the need for an investor’s own assessment.

The audit and investor-side review may have different reporting dates, materiality thresholds and objectives. The audit may also address the fund’s financial statements as a whole rather than provide a separate conclusion on every underlying asset. Independent validation can therefore provide additional investor-side governance without duplicating the audit.

A Proportionate Approach

Independent services can range from full asset-level valuations to targeted assurance procedures, analytical benchmarking and valuation policy reviews.  The appropriate approach depends on the materiality and complexity of the exposure, the level of information available and the degree of comfort required.

For allocators with many fund positions, a scorecard approach can help identify where deeper analysis or challenge is most needed.  The assessment may consider exposure size, concentration, valuation complexity, GP governance, reporting transparency and valuation movements that appear unusual or stale. This allows review effort to focus on the largest, most complex or least transparent positions.

Information Determines the Achievable Scope

The scope of any review, and the level of comfort it can provide, depends on the information available. This includes the transparency of the GP reporting pack, the investor’s ability to request supplementary information, the GP’s willingness and ability to provide it, and any confidentiality or information-sharing restrictions. The scope, information dependencies and resulting limitations should therefore be agreed at the outset and clearly stated in the final report.

Strengthening Audit Readiness

Auditors are focusing as much on governance and controls as they are on the final numbers. Asset managers can streamline audit cycles and strengthen their valuation process by:

• Maintaining a clear valuation policy that defines methodologies, responsibilities, approval authorities, and revaluation triggers.
• Engaging an independent valuer to provide external challenge of material assumptions and reduce the risk or perception of management bias.
• Creating a robust audit trail of inputs, models, and decisions, including evidence of review, challenge and approval.
• Engaging auditors early to discuss methodologies,  assumptions and complex or judgmental investments.
• Back-testing model-based valuations against subsequent exits, financing rounds, secondary transactions and operating performance, where available.

Independent Valuation as Part of Stronger Governance

Whether the exposure is a direct investment or an LP interest, the underlying requirement is the same: institutions should be able to explain how the reported value reflects current market conditions, company performance and the economic rights of the investment.

Independent valuation is not simply about producing another number. It provides objective analysis, documented challenge and stronger governance around the assumptions and judgements supporting private market valuations. The appropriate level of support should be proportionate to the materiality and complexity of the exposure, the information available and the degree of comfort required.

This article has focused on direct private equity investments and private equity fund interests, building on the private credit themes introduced in Private Credit Valuations Under Pressure: How to Approach Standard Loan Marks on the S&P Global Market Intelligence website.

In Part 3, we will discuss the emergence of Hybrid Securities as an important source of flexible capital. We will examine how valuation professionals can navigate the challenges associated with some of the complex features of these Hybrid securities and producing valuations that are commercially relevant and technically defensible.