CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

CHAPTER 12

Private Equity Fund Valuation

As previously mentioned in the context of monitoring, it is fair to say that there is a trade-off in terms of costs and benefits to private equity fund valuation. This trade-off also exists between the valuation's level of precision (i.e., attempt to minimize errors) and timeliness.

When discerning the value of private equity funds, it is necessary to differentiate among the following concepts:

• A valuation for accounting purposes that primarily aims to ensure the timeliness of the reported value and its compliance with accounting standards such as Financial Accounting Standard (FAS) 157 or International Accounting Standard (IAS) 39 and/or valuation guidelines such as the International Private Equity and Venture Capital Valuation Guidelines (IPEV Valuation Guidelines), developed and launched in 20051
• The economic value of limited partnership shares that can be used for portfolio management purposes
• The price that can be obtained on the secondary market

In this chapter, we describe the three main approaches employed to value private equity funds: the net asset value (NAV) approach, the internal rate of return (IRR) approach, and the economic value approach.

12.1 NET ASSET VALUE (NAV)

Limited partnership shares have traditionally been valued by multiplying the NAV of the fund by the percentage of shares owned in the fund. In private equity, the NAV is often referred to as a fund's residual value, as it represents the value of all investments ...