By: Chris Lombardy
Private fund valuation continues to sit at the center of regulatory, investor, and operational scrutiny. Expert industry panelists from Salus GRC’s November 18 webinar included:
- Chris Lombardy, President of Salus GRC
- Gary Berger, CPA, Director, Financial Services Industry Leader NE, CohnReznick
- Chris Franzek, Managing Director, Valuation Advisory, Stout
The panel shared practical insights into the pressures shaping today’s valuation landscape. The following key themes emerged from their discussion.
1. The Democratization of Private Markets
The democratization of private markets—particularly the rise of evergreen, interval, and other retail-accessible vehicles—is expanding the audience for private fund valuation beyond institutional investors. Panelists noted a surge in firms exploring evergreen structures, creating heightened sensitivity around how valuations are determined and communicated.
Retail investors and retirement accounts are increasingly affected as retail channels begin purchasing illiquid positions that were previously held primarily by endowments and other institutional investors.
2. Keeping Assets at Cost Is No Longer Defensible
A consistent pain point raised by auditors and valuation specialists is the practice of holding positions at cost well beyond the acquisition period. The panel emphasized that while cost may equal fair value in certain circumstances, it is never automatically fair value. Robust analysis is required to support the determination.
3. The Growing Expectation to Use Valuation Specialists
Although GAAP does not mandate the use of external valuation specialists, their involvement is increasingly favored by investors, auditors, and regulators—particularly in private equity and less-liquid strategies. Outsourced specialists enhance credibility and consistency across valuation cycles.
Independent verification beyond standard valuation processes is becoming more common.
4. Updating Valuation Policies Is a Critical Control
Many managers fail to update valuation policies as their strategies evolve. Panelists cited examples of funds where individuals who departed years ago remain listed as valuation committee members. Out-of-date policies are a red flag for auditors and regulators and can impair the defensibility of valuation marks.
Valuation policies must be tailored to the specific asset classes held and must comply with ASC 820’s definition of fair value.
5. Valuation Committee Frequency Should Align with Reporting
While no regulation prescribes a specific valuation committee cadence, best practice is to align formal meetings with reporting cycles—quarterly for quarterly reporters and monthly for vehicles with more frequent valuations. Smaller firms may employ shorter or more informal processes, but documentation remains essential regardless of firm size.
6. Documentation Matters, Especially When Deviating
Both auditors and regulators closely scrutinize deviations from standard valuation procedures. Occasional exceptions may occur, but when exceptions become routine, they signal a broken process. Inadequate documentation remains one of the most common sources of audit friction and regulatory risk.
Valuations directly impact annual financial audits and marketing materials, prompting deeper auditor review.
7. Transparency Is Crucial When Supporting Your Marks
Managers must be able to clearly articulate the inputs, methodology, and rationale supporting their valuations. If a manager cannot “get the auditor there,” disagreement is inevitable. Missing data or the withholding of proprietary information undermines trust with both auditors and investors.
Valuation agents, auditors, and administrators each have different thresholds for acceptable subjectivity in valuation assumptions.
8. Consistency Matters — Systematic Over- or Under-Valuation Raises Flags
Panelists noted that auditors and valuation specialists frequently compare results across managers. Firms that are consistently conservative or consistently aggressive relative to peers are more likely to attract scrutiny from both investors and regulators.
9. Provider Selection Has Real Consequences
Given the wide variation in quality and rigor across valuation providers, selecting the right partner is essential. The panel noted that experienced providers can recognize when a valuation falls outside reasonable market ranges, based on their exposure to multiple private companies and funds.
Variability in how positions are marked—quarterly, annually, or selectively—affects how auditors interact with valuation agents and can influence final audit outcomes.
10. Fairness and Transaction Opinions Serve a Distinct Purpose
Continuation funds, GP-led secondaries, and other modern transaction structures often require fairness or transaction opinions that are distinct from standard valuations. These analyses help mitigate conflicts of interest and provide transparency in increasingly complex fund structures.
Continuation, interval, and evergreen funds introduce unique conflicts of interest that necessitate fairness or transaction opinions. These opinions add multiple layers of analysis beyond traditional valuation practices.
Slower exits are contributing to aging vintages and so-called “zombie funds,” increasing pressure on valuation assumptions. Effective valuation depends on close collaboration among fund managers, auditors, valuation agents, and fund administrators.
Conclusion
As private fund strategies evolve and retail access expands, robust valuation governance has become a defining marker of a well-run advisory firm. By strengthening policies, improving documentation, and maintaining transparent collaboration with auditors and valuation specialists, fund managers can better navigate regulatory scrutiny and reinforce investor confidence.