All Insights

Performance & Reporting

Private Market Valuations: How LPs Should Interrogate NAV Marks

Every quarter you inherit a number nobody traded. Here is how experienced allocators read fair value marks, spot where optimism accumulates, and hold managers to a consistent standard.

Matthew S. · Founder, Allocator Desk · August 2026 · 11 min read

Private markets run on a number that nobody trades. Every quarter, a general partner sends a statement with a net asset value on it, and that figure flows straight into your exposure report, your board pack, your pacing model, and your incentive math. It is an estimate produced by the people whose track record depends on it. That is not an accusation, it is a structural fact, and serious allocators build their process around it.

This is a guide to reading marks the way an experienced LP reads them: what fair value actually means in practice, where optimism tends to accumulate, which questions surface real information, and how to hold managers to a consistent standard without becoming the client nobody wants to call.

What a mark is, and what it is not

Under fair value accounting, a private position should be carried at the price a willing buyer would pay a willing seller at the measurement date. In public markets that price is observable. In private markets it has to be constructed, usually one of three ways.

The first is a market approach: apply a multiple drawn from comparable public companies or recent transactions to the portfolio company's earnings or revenue. The second is an income approach: discount projected cash flows back to the present. The third is a transaction reference: use the price of a recent financing round, a secondary sale, or a partial exit in the same company.

Each approach involves judgment. Which comparables are truly comparable. Whether to apply a discount for size or illiquidity. Whether trailing or forward earnings belong in the denominator. Whether adjusted earnings should include the add-backs management proposes. Reasonable, honest people land in different places, and the spread between two defensible answers on a single company can be wide enough to move a fund's reported multiple by a meaningful margin.

The practical takeaway is not that marks are unreliable. It is that a mark is a conclusion supported by an argument, and your job is to evaluate the argument.

Where optimism accumulates

Bias in private valuations is rarely deliberate. It shows up in patterns, and the patterns are recognizable.

Comp set drift. When public multiples compress, some managers quietly widen the comparable universe to include names that held up better, or shift from a median to a mean, or add a "quality premium" that did not exist a year earlier. The mark stays flat while the market moves. Watching a comp set change over consecutive quarters is one of the more revealing exercises an LP can do.

Adjusted earnings inflation. The multiple gets the attention, but the denominator does more work. Add-backs for one-time costs, run-rate synergies from an acquisition that closed last month, and pro forma contributions from contracts not yet signed can all be legitimate. They can also stack up until reported earnings bear little resemblance to cash generation. Ask for a bridge from reported to adjusted earnings and track how the bridge grows over time.

Anchoring on the last round. In venture and growth, positions are often held at the price of the most recent financing until a new round resets it. When the funding environment tightens, that convention leaves stale marks sitting on the books for several quarters. A company carried at a 2021 round price in a 2026 statement is not necessarily mismarked, but the burden of explanation sits with the manager.

Asymmetric timing. Markups tend to be recognized promptly, and write-downs tend to arrive in batches, often in the fourth quarter alongside the audit. If a manager's negative revisions cluster in audited quarters, the interim marks are doing less work than they should.

Smoothing. Private valuations that barely move through a volatile public market cycle are not evidence of stability, they are evidence of a slow measurement process. Reported volatility that is far below the underlying economic volatility flatters risk statistics and understates correlation to public equities.

The questions that actually produce information

Generic questions produce generic answers. Specific, comparative, and repeated questions produce information. A short list that earns its place in a quarterly review:

1. Which positions changed methodology this quarter, and why? A methodology switch is the single highest-signal disclosure in a valuation pack. 2. Show me the comp set for the top five positions, this quarter and four quarters ago. Composition changes tell you more than the multiples do. 3. What is the bridge from reported earnings to the earnings used in the valuation? Then ask how much of that bridge is realized versus projected. 4. Which positions are carried above their last third-party reference point, and by how much? Last round, secondary trade, or bid received. 5. What did the auditor push back on, and where did you land? Managers who answer this candidly are usually the ones with defensible processes. 6. Where has the valuation committee overruled the deal team? If the answer is never, the committee is a formality. 7. What would have to be true for this mark to be twenty percent too high? Good investors answer this quickly because they have already asked themselves.

Ask the same questions every quarter, in the same order, and record the answers in a place your successor can find. The value is in the time series, not in any single response. That is exactly the kind of continuity that erodes when institutional knowledge lives in individual inboxes.

Governance signals worth more than the numbers

You will never fully reconstruct a manager's valuations from the outside. What you can assess is the machinery that produces them, which is the core of a good operational due diligence framework.

Look for a written valuation policy that specifies methodology by asset type, the frequency of review, and who signs off. Look for a valuation committee with genuine independence from the deal team, ideally including a member with no carry exposure to the positions under review. Look for third-party involvement, whether a full independent valuation for material positions or a review of the manager's own work, and ask how disagreements are resolved. Look at auditor tenure and whether the audit opinion has ever contained a qualification.

Then check consistency of application. A policy that says recent transactions take precedence, applied only when the transaction supports a higher price, is not a policy. It is a preference.

Reading marks against realizations

The most reliable check on a manager's valuation discipline is history. Exit price versus the carrying value immediately prior to exit, measured across every realization the firm has produced, tells you whether marks have been conservative, aggressive, or accurate.

Ask for that dataset directly. Many managers have it, and the ones who do not are telling you something about their internal rigor. Look at the distribution rather than the average, because a firm can be systematically aggressive on its losers while exiting winners above carry, and the mean will look fine.

This work sits naturally alongside your performance benchmarking process, because unrealized value is the softest input in every interim return figure you report. It also feeds directly into the re-up decision, where a manager's mark-to-realization record deserves as much weight as headline IRR.

Where NAV meets the rest of your program

Valuation quality is not an isolated diligence topic. It propagates.

Unrealized marks drive interim IRR, and interim IRR drives peer comparisons, manager rankings, and sometimes compensation. Marks feed the denominator in exposure and concentration limits, so an inflated NAV quietly understates how far you are from a policy breach. They influence pacing and commitment models, because expected distributions are anchored to carrying values. They set the reference price in secondary transactions, which is why GP-led continuation vehicles demand a harder look at the mark than almost any other situation, since the manager is effectively both seller and buyer.

And when leverage sits between the fund and its LPs, the picture gets softer still. Subscription lines and NAV facilities change the timing of cash flows and the level of reported returns without changing a single underlying company. A mark that looks fine in isolation can be doing a lot of work once financing effects are stripped out.

A workable quarterly routine

You do not need a valuation team to do this well. You need a repeatable habit.

Read the valuation section of every quarterly report before the performance summary. Flag every methodology change, every position held flat for more than three quarters, and every position carried above its last external reference. Compare the manager's revision pattern to public market moves in the same period. Log your observations against the fund record so the next reviewer inherits your reasoning rather than starting over. When something looks unusual, ask once, in writing, and file the answer.

Over a few years this produces something more valuable than any single quarter's judgment: a documented view of how each manager behaves when marks are inconvenient. That is the information that separates the funds you re-up into from the ones you politely pass on.

:::related /insights/benchmarking-private-equity-irr-twr-pme-for-lps Benchmarking Private Equity Performance How IRR, TWR, and PME differ, and what allocators should actually compare when unrealized value dominates returns. :::

:::related /insights/operational-due-diligence-odd-lp-framework Operational Due Diligence for LPs A practical ODD framework covering cash controls, valuation governance, service providers, and key person risk. :::

:::related /insights/subscription-lines-and-nav-facilities-what-lps-need-to-track Subscription Lines and NAV Facilities Why fund-level leverage flatters early returns, and the disclosures LPs should ask for every quarter. :::

:::related /insights/gp-led-secondaries-lp-decision-framework-continuation-vehicles GP-Led Secondaries and Continuation Vehicles A decision framework for the transactions where the manager sits on both sides of the price. :::

Frequently asked questions

How are private equity investments valued?

Private positions are carried at fair value, estimated using a market approach based on comparable company or transaction multiples, an income approach based on discounted cash flows, or a reference to a recent financing or secondary transaction in the same company. Each method requires judgment on comparables, discount rates, and earnings adjustments, so two defensible valuations of the same asset can differ materially.

Why do private market valuations lag public markets?

Private marks are set quarterly using inputs that are themselves backward looking, including trailing earnings and comparable multiples measured at a point in time. Reporting arrives 45 to 90 days after quarter end, and some conventions hold positions at the last financing price until a new round resets it. The result is measured volatility well below the underlying economic volatility.

How can LPs tell if a manager's marks are aggressive?

The strongest evidence is history. Compare exit prices to the carrying value in the quarter immediately before each exit, across every realization the firm has produced, and look at the distribution rather than the average. Supporting signals include methodology changes, widening comp sets, growing earnings add-backs, positions carried above their last third-party reference, and write-downs that cluster in audited quarters.

What should an LP look for in a valuation policy?

A written policy that specifies methodology by asset type, review frequency, and sign-off authority. A valuation committee with real independence from the deal team. Third-party valuation or review for material positions, with a defined process for resolving disagreements. Most importantly, evidence that the policy is applied consistently rather than selectively.

Do NAV marks affect capital calls and distributions?

Not directly, since calls and distributions are driven by deal activity rather than carrying value. Indirectly they matter a great deal, because pacing models and distribution forecasts are anchored to NAV, and NAV facilities can be sized against it. An inflated mark tends to produce optimistic liquidity planning.

How often should LPs review manager valuations?

Every quarter, using the same short question set each time so the answers form a comparable time series. A deeper review, including the mark-to-realization dataset and the current valuation policy, belongs in every re-up evaluation and in any secondary or continuation vehicle decision.

Topics

• Valuation
• NAV
• Fair Value
• Performance & Reporting
• Governance