The Valuation Question: Operational Risk in Private Markets

Valuation remains a core area of focus within operational due diligence (ODD) for private markets strategies. Unlike listed securities, private assets are not traded on public exchanges, and their valuation involves a significant degree of estimation and judgment. In the absence of observable market prices, asset managers must employ methodologies that are not only technically sound but also governed with transparency and discipline.

Subjectivity and inconsistency: the valuation landscape today

The challenges surrounding private markets valuation are compounded by inconsistency in practices across strategy types. While it is common for managers to engage third-party valuation agents for real estate portfolios—particularly open-ended funds—this is not a standard feature across the private market strategy spectrum. In private equity, infrastructure, and private credit, the use of external valuers is far more varied.

This variation in approach creates a material challenge for asset owners: how can one determine whether a manager’s valuation methodology reflects best practice? Moreover, even where frameworks appear aligned with established standards, subtle differences in implementation—such as how third-party inputs are used—can materially affect portfolio NAV, fee calculations, and ultimately investor outcomes.

Governance and accountability: who owns the valuation process?

A clear governance structure is fundamental to mitigating valuation risk. The FCA emphasises the need for transparency around the governing body responsible for valuations—typically a valuation committee—and the precise nature of its role, whether advisory or decision-making.

Investors should be aware of how regulatory frameworks affect this governance. For example, within the European Union, a fund operating under the Alternative Investment Fund Managers Directive (AIFMD), the Alternative Investment Fund Manager (AIFM) will always hold ultimate responsibility for the vehicle’s valuation framework. However, the AIFM is permitted to delegate asset valuation to the relevant manager whilst retaining regulatory responsibility for the overarching framework. In instances where the AIFM is a third-party, the asset manager’s internal valuation committee may only submit recommendations, with final decisions made externally.

In practice, many large managers have affiliated AIFMs, which may blur the line between internal and external oversight. Still, the regulatory accountability remains with the AIFM. From a governance perspective, best practice is clear: the valuation committee should be functionally independent of the investment team and composed of senior operational figures, such as the CFO, CRO, or equivalent.

Valuation policies: documentation and transparency

The existence of a well-defined, clearly documented valuation policy is a critical tool for transparency. This policy should be made available to prospective and current investors and should explicitly set out:

• The valuation methodology and frequency
• How inputs are sourced, benchmarked, and validated
• Circumstances that trigger revaluation outside regular cycles
• How decisions are documented, reviewed, and approved

Such policies are not merely procedural documents—they are foundational for due diligence. When reviewing a manager, the policy provides a framework to evaluate how valuation decisions are made, who is involved, and how investors are protected from subjectivity or bias. The absence of a comprehensive valuation policy should raise questions for any institutional allocator.

Industry guidelines and accounting standards

To ensure consistency and adherence to best practice, asset managers should benchmark their approaches against established industry standards. These include:

• IPEV Guidelines (International Private Equity and Venture Capital Valuation)
• RICS Valuation Standards (for real estate)
• SBAI Valuation Framework (for alternative credit)

In parallel, the accounting framework under which a vehicle operates—typically US GAAP or IFRS—will inform how valuations are recorded in financial statements. Both frameworks focus on the concept of ‘fair value’, defined as the price at which an orderly transaction would occur between market participants at the measurement date.

Investors should examine a vehicle’s audited financial statements to understand which accounting standards apply, how valuations have evolved over time, and whether the auditor has raised any issues related to valuation assumptions or methodologies. These documents remain a vital resource in understanding how theoretical frameworks translate into practice.

The role of independent valuation agents

Independent valuation agents play a variable role across private market strategies. For open-ended real estate portfolios, for example, bfinance would expect regular third-party valuation using RICS-accredited agents. However, in private credit or infrastructure, their involvement may be more limited—or absent entirely.

In some cases, the choice of whether to engage a third-party valuer is dictated by fund structure. We observe geographical dispersion with respect to the use of valuation agents as it relates to closed-ended commingled real estate funds. For bespoke mandates, asset owners often have greater discretion to impose valuation protocols, though they must weigh up the benefits agaisnt the cost implications.

When independent valuers are engaged, key questions should include:

• Are they providing full independent valuations, range-based estimates, or simply reviewing internal assessments?
• If a range is provided, does the manager use the midpoint, or apply judgment?
• Are adjustments ever made to third-party inputs, and on what basis?

Investors should also consider whether there are potential conflicts of interest between the manager and the valuation agent. For instance, some of the ‘big four’ audit firms also provide valuation services—raising concerns around independence if the same firm is auditing the financial statements. A manager’s valuation policy should clearly articulate the frequency with which they will rotate across appointed third-party valuation specialists.

Conflicts of interest: fees, flows and fairness

Valuation directly affects multiple components of the investor experience—most notably fees and fund flows. This gives rise to a range of conflicts of interest that investors must evaluate carefully.

In open-ended funds, inaccurate valuation can distort pricing for subscriptions and redemptions. If NAVs are overstated, redeeming investors may benefit at the expense of those remaining. Similarly, new investors may overpay on entry.

In closed-ended vehicles, fee structures may appear to reduce this risk, but conflicts can still emerge. For instance, during the post-investment period, management fees are typically calculated on invested capital. If an asset’s value declines, a write-down reduces fees—potentially creating an incentive for delay or inaction in recognising impairment.

This makes the integrity of the valuation framework—and the role of internal control functions such as risk, compliance, and internal audit—crucial. These teams must be empowered to ensure adherence to documented policies and procedures.

Secondary transactions, continuation funds and seeded assets

Recent trends in private markets introduce further layers of complexity. The use of GP-led secondary transactions and continuation vehicles has expanded significantly. While these can be legitimate tools for extending holding periods or recycling capital, they also create valuation-related conflicts. If a manager is effectively selling assets to itself, the valuation at which that transaction occurs is of material consequence to both exiting and rolling investors.

Similarly, where a manager has seeded assets ahead of a new fund launch, the valuation used for asset transfer into the new vehicle should be independently determined and clearly disclosed. Best practice includes the use of third-party specialists and transparency with the vehicles’ respective Limited Partner Advisory Committees (LPAC).

Institutional investors should seek to understand:

• Whether independent valuation advice was obtained
• If the transaction was approved by internal control functions
• What role LPACs or similar governance bodies played in the approval process

The role of Operational Due Diligence (ODD)

Given the technical complexity of private market valuation frameworks—and the potential financial and reputational risks—many investors now rely on specialist ODD practitioners to assess valuation governance and related controls.

Our Operational Risk Solutions team has seen a notable increase in ODD projects related to private markets over the past 18 months. These have spanned a wide range of sub-strategies including real estate (equity and debt), infrastructure, private equity and venture capital, real assets such as farmland and timberland, and private credit, including NAV finance, trade finance, and subscription line finance.

In each case, the robustness of valuation practices and associated governance is a core area of focus.

Conclusion

Valuation is not just a technical accounting matter—it is a critical source of operational risk, with implications for pricing, fees, governance, and investor fairness. As institutional allocations to private markets continue to rise, so too does the importance of robust, transparent, and disciplined valuation frameworks.

Investors should hold managers to a high standard, backed by clear documentation, independent oversight, and adherence to recognised industry practices. In an increasingly complex environment, effective ODD remains a vital tool in protecting investor interests.

Definitions

• SBAI Valuation Framework: A set of guidelines and best practices designed to improve transparency and consistency in the valuation of alternative investments.
• AIFMD: A regulatory framework which applies to EU domiciled private markets funds.
• IPEV: Valuation guidelines published by the International Private Equity Valuations Board. The guidelines establish best practice standards for Private Equity and Venture Capital managers.
• Net Asset Value: Typically referred to as NAV, is the value of an investment fund’s assets after subtracting its liabilities (e.g. fees and operating expenses), expressed as a per-unit price.
• RICS: The Royal Institution of Chartered Surveyors. A professional body which publishes global valuation standards (Red Book) for real estate equity investments.