Estimated reading time: 4 minutes

The article in brief:

• Private markets are facing heightened scrutiny as valuation marks differ across managers, particularly for stressed/distressed assets, continuation vehicles, and private credit and private equity asset structures.
• Strong valuation programs require formal policies, independent governance, observable data, back-testing, and rigorous documentation.
• Fund sponsors that adopt best practices improve transparency, sharpen investor confidence, and strengthen resilience in a shifting regulatory and audit environment as valuation frequency accelerates.

Valuation has always been central to how private markets operate. But today, amid rapid industry growth, more frequently required valuations, increasing cross-held investments, more complex structures, and heightened investor and auditor scrutiny, the quality and consistency of private market valuations have become even more important.

As VRC Managing Director Adam Smith often observes, “Valuation is only as credible as the processes, governance, and documentation that support it.” With decades of experience helping shape global valuation standards at the FASB and the IVSC, Adam has seen firsthand how formalizing fair-value methodologies and institutional controls—rather than relying solely on judgment—helps build durable investor and stakeholder confidence.

Recent reporting has brought attention to longstanding differences in how firms measure fair value for similar assets, notably stress or distressed assets, which is raising questions around consistency, methodology, and transparency in private equity and private credit portfolios. Broader market participants including academics, regulators, and institutional investors are increasingly focused on whether valuations are well-supported, data-driven, and free of conflicts of interest.

Some commentary has also noted that valuations used in transactions such as continuation vehicles can vary widely, especially when assets lack observable trading activity. These structures can introduce potential conflicts of interest because GPs often sit on both the selling and buying sides, which reinforces the importance of independent oversight and robust valuation governance. In a recent Bloomberg article, Jay Clayton of the Department of Justice, stated the public will “want to know that private marks, where there’s liquidity offered or an asset value-based fee to be paid, are good marks,” he also warned “People should know that the financial regulators and the department are looking at those.”

At the same time, the rapid growth of retail-oriented semi-liquid and liquid fund structures—including interval funds, tender-offer funds, mutual funds, and ETFs—has heightened expectations and the importance of timely and defensible valuations. Many of these vehicles require monthly or even daily valuation updates. Investors in these vehicles are now entering and exiting based directly on net asset value (NAV). That shift means valuation practices once used primarily for institutional performance reporting now influence real-time subscription and redemption decisions, raising the stakes for precision, consistency, and governance.

Against this backdrop, fund sponsors have a clear opportunity—and responsibility—to reinforce their valuation practices. Drawing from VRC’s Best Practices for Private Fund Sponsors white paper and today’s market environment, the following best practices form a blueprint for a valuation program that is transparent, defensible, and well-positioned for the future.

1. Build and Maintain a Comprehensive, Written Valuation Policy

A written valuation policy is the cornerstone of an effective valuation program. Yet, the level of detail and discipline embedded within policies varies widely across private market funds.

A robust policy should:

• Define valuation methodologies by asset class
• Articulate roles and responsibilities for conducting and reviewing valuations
• Establish inputs, hierarchy, and documentation standards
• Address stressed, distressed and illiquid scenarios
• Outline criteria for methodology changes
• Include a framework for periodic back-testing
• Require benchmarking against observable public marks for comparable assets, when available

Regular updates keep the policy aligned with evolving markets, regulatory expectations, and investment strategies.

2. Strengthen Governance Through Independence and Structured Oversight

Governance is one of the most critical elements of valuation best practice. Without strong oversight, even well-written policies can be applied inconsistently.

Industry discussion has increasingly focused on valuation risks when assets transfer between affiliated funds or continuation vehicles without a clear market-based price. Low-liquidity environments can heighten subjectivity and create potential misalignment with investor interests.

Best-practice governance includes:

• Independent valuation committees
• Clear segregation between deal teams and valuation oversight
• Materials and minutes documenting review and challenge
• Use of outside valuation experts to add expertise and bolster independence
• Consistency checks across funds, vintages, and assets

Because VRC often values the same asset across multiple client portfolios, we maintain a formal internal risk management and consistency review process. This ensures we apply a consistent review across similar assets and ensures methodologies are applied objectively, regardless of the client or fund structure. Many boards inquire as to how our team manages this, and such internal controls form a key part of the answer.

3. Prioritize Methodologies Anchored in Observable Market Inputs

Input selection and weighting remain one of the greatest sources of divergence across managers. This dynamic affects both private credit and private equity. In private credit, trading levels can highlight divergences more quickly, while in private equity fewer observable public valuation benchmarks or club structures often mean the effects are less visible, but the valuation challenges are similar. Such challenges are most acute in distressed assets, where dispersion in reported fair value measurements across managers can be significant and where valuations may adjust rapidly as credit quality changes.

Academic work has raised questions about whether some private credit valuations may be overly optimistic about recoveries, especially for troubled borrowers.  Market commentary has similarly noted that valuation adjustments sometimes lag changes in credit quality.

Best practices emphasize:

• Prioritizing observable market data
• Supporting unobservable inputs with rigorous analysis
• Applying consistent methodologies across similar assets
• For distressed assets, applying realistic scenario analysis and weightings of all reasonable outcomes
• Conducting back-testing and reasonableness checks
• Refreshing inputs as company data is received and markets move

4. Enhance Documentation and Transparency

A valuation conclusion is only as strong as its support. Thorough documentation remains one of the most scrutinized elements in audits and regulatory exams.

High-quality documentation includes:

• Asset-level valuation memos
• Support for all assumptions and inputs
• Change logs and methodology rationale
• Evidence of internal challenge and governance review
• All source data and model output files

Strong and complete documentation benefits audit readiness, investor confidence, and internal continuity, especially during market stress. Client should not “filter” data supplied to internal or external valuation teams.

5. Engage Independent Valuation Specialists When Appropriate

As private markets grow more complex, independent valuation support is increasingly a best-practice expectation. Industry groups have emphasized that many firms supplement internal controls with independent pricing experts to strengthen objectivity and consistency.

Independent valuations help:

• Validate methodologies
• Benchmark assumptions against current market averages
• Support hard-to-value assets and complex fund structures
• Increase investor and auditor confidence
• Reduce defensibility risks during liquidity events or fund transitions

6. Anticipate Heightened Investor and Regulatory Expectations

Private market participants—LPs, auditors, and regulators alike—have become more focused on valuation transparency, consistency, and governance. Divergent reported valuations and inconsistent assumptions, even for similar assets, will continue to draw attention.

Fund sponsors that proactively adopt best practices will be better positioned to navigate this environment, reduce operational friction, and enhance credibility across the private markets’ ecosystem.

How VRC Can Help

For 50 years, VRC has supported private market investors with rigorous, independent valuation services anchored in consistency, transparency, and technical depth in both valuation complexities and capital markets. Our Portfolio Valuation Practice Group is one of the most experienced in the industry, advising many of the world’s leading private equity, private credit, venture capital, and alternative asset managers.

As private markets expand and face increased scrutiny, VRC’s independent perspective and five decades of experience help sponsors build valuation programs that are transparent, repeatable, and defensible—across cycles, capital structures, and fund vintages.

If your organization is looking to refine its valuation policies, benchmark its governance framework, or strengthen independent oversight, our team is ready to help. We encourage you to contact the article authors or a VRC professional near you.