In recent press, it has been suggested that the investments in private assets, such as private equity, held by certain university endowments are often overvalued.

Based on our industry experience, our knowledge of the relevant accounting rules, and in-depth knowledge of asset managers’ portfolio valuation processes, we think there’s reason to believe that in the ordinary course of business, the valuations used by university endowments and other limited partners in private equity funds are not systematically overvalued and may be more on the conservative side of fair value.

Understanding Fair Value Reporting and Valuation Standards

Nearly 20 years ago, the Financial Accounting Standards Board clarified the valuation standards required for investment managers to employ when determining the fair values of their investments. Prior to FAS 157 (which was replaced by ASC 820), managers would generally report the value of private assets at cost for financial reporting. Today, private assets are reported at Fair Value, or “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

Admittedly, determining Fair Value is part art and part science, and it requires both knowledge of the asset and valuation expertise. On balance, we think most asset managers take the responsibility to produce reasonable fair value estimates of their assets seriously and that most investment managers use their best efforts to ascribe reasonable and appropriate valuations.

Private assets are generally valued (or marked) by fund managers on a quarterly basis, and by the time valuations are provided to investors, they’re already dated. Market conditions can change quickly and sometimes significantly as we saw this past April when equity indices dropped 10% at the start of April.¹ By the time typical private equity managers reported to investors in mid-May, the market had rebounded to a higher level than it was on March 31 and back into positive territory for the year.²

Institutional investors, such as university endowments, can report the value of private assets at values determined by the underlying managers per accounting guidance provided by U.S. GAAP (ASC 820). This “practical expedient” is common for a variety of reasons. The word “practical” is key here since it is usually not practical for a limited partner with a large portfolio managed by third parties to value each of those underlying companies given the staffing and technology resources that would be required. Additionally, the investment manager has the best access to information and should be more qualified to assess the value of a fund’s underlying asset than a fund investor who is further removed from the company.

If one were to look at private asset values as of mid-April 2025, in most cases, the most recent valuations would be as of December 31, 2024, and not reflect any 2025 market conditions, as the March 31 valuations wouldn’t be reported for approximately 45 days. Any market declines that occurred in the second quarter would not be accounted for until quarterly valuations for June 30 (to be provided in mid-August), but in 2025 we know that the quarter finished in positive territory. Valuations as of mid-April could have been overstated, but institutional investors are not likely concerned about the intra-month volatility of a long-term asset that is typically not among assets that are regularly traded but rather held for the duration of the investment’s contractual term.

The Secondary Market for Private Equity Interests

It is true that in the secondary market for private equity fund interests, assets often transfer at a discount to net asset value (NAV), but there are often seller motivations that are not disclosed that would explain why an asset was sold before its contractual life was over. Secondary pricing reflects values for the assets that an institutional investor has decided to sell (usually a limited partnership interest in a private equity fund), and not the value of the individual underlying assets held within the limited partnership fund interest which the limited partners cannot liquidate – something only the fund’s general partner (the investment manager) can do. General partners make individual liquidity decisions on underlying assets held by an investment fund based on the assets’ inherent quality and value. An institutional investor’s cost of converting an illiquid asset into a liquid asset is most easily reflected in the discount from Net Asset Value received in the secondary market.

Evidence of Conservative Valuation Practices in Private Equity

Research has shown that private equity valuations made by investment managers tend to be conservative, especially when compared to the ultimate exit valuations. In April 2023, StepStone Group published a study that looked at 2,406 exits across more than 100 private equity managers. The study determined that the average exit is realized at a premium of 24% to the carrying value three quarters prior, and 42% above the carrying value five quarters prior. Once a deal is close to exit, the value of a company in the final quarter it is owned by a fund is typically in line with expected proceeds as the reported fair value converges with exit value.

So why would values be more likely to be understated than overstated? Successful private equity managers did not get to be that way by misleading their investors. They became successful by delivering returns that met or exceeded the expectations of their institutional investors. If a manager is overvaluing the investment, they are setting up expectations that they will not be able to meet, thus disappointing their investors on exit. As a result, StepStone’s study suggests a tendency toward conservativism in pre-exit valuations.

Valuing a Venture Capital Portfolio

The valuation of a venture capital portfolio, however, can be more difficult. In our own recently published article, we highlight some of the challenges in valuing venture capital investments. One of the biggest challenges is the quality and availability of the information provided to investors. Most VC funds are minority investors in their portfolio companies, so information is usually more limited than for larger private equity deals where the fund owns a controlling interest in the portfolio investment. Information provided to a minority investor can be limited to a handful of data points provided quarterly, or even less. Since different investors can have different information rights, wide valuation disparities can exist among investors in the same deal.

Valuation best practices will continue to evolve, especially as regulators and asset managers seek to provide access to private equity and other alternative investments. To help reinforce investors’ confidence in private asset valuations, a growing number of asset managers employ third-party valuation firms, such as Stout. In the end, are private asset marks perfect? No, and they probably never will be. After all, if there was a more active market to derive accurate pricing then they wouldn’t really be private assets.

1. As of April 8, 2025, the S&P 500 Index was down 15.3% year to date, compared to being down 4.6% as of March 31, 2025.
2. The S&P500 Index was up 0.6% year to date through May 15, 2025, and up 0.5% year to date through May 30, 2025.