Marking the Portfolio

Why marks matter so much

For most of a fund's life, its reported performance is largely an opinion. A five-year-old fund showing 2.0x TVPI may have returned 0.3x in cash; the rest is net asset value (NAV), the fund's estimate of what its remaining holdings are worth. LPs use those numbers to decide whether to commit to the next fund, and GPs typically raise the next fund in years three to five, when nearly all the value is still unrealised.

That's the tension. Marks are necessary, they're consequential, and they're produced by the party with the most to gain from them being high.

What "fair value" means

Under both US GAAP (ASC 820) and IFRS (IFRS 13), fair value is an exit price: what you'd receive selling the asset in an orderly transaction between market participants at the measurement date. Not what you paid, and not what you hope it's worth at exit. What a willing buyer would pay for this position, today.

Venture funds report their investments at fair value, which is why every quarter involves a valuation exercise even when nothing has happened.

The last round is a starting point, not an answer

The easiest mark is "hold at the price of the most recent round." That's often reasonable shortly after a round priced by an outside lead, and less reasonable every quarter after. The IPEV Guidelines are explicit that the price of a recent investment isn't a default: the valuer has to consider whether anything has changed since.

What changes it:

• The company is ahead of or behind the plan the round was priced on.
• Public comparables have moved sharply since the round.
• The round was small, insider-only or on unusual terms, so its price says less about market value.
• Runway. A company with four months of cash is worth less than its last round suggests.

Same company, different values: share class

A round's headline price is the price of the newest preferred share, carrying the newest and usually most senior rights. Your fund may hold an older series with a different preference and seniority. Common shares sit below all of it.

So "the company is valued at $100M" doesn't mean every share is worth $100M divided by the share count. In a modest exit, the preference stack decides who gets paid: the senior series might be made whole while common gets little. Valuers handle this with methods like the option pricing model (OPM) backsolve — calibrate a model to the price paid in the latest round, then use it to value each class — or a probability-weighted scenario analysis of exit outcomes, each run through the company's waterfall.

That's the same waterfall logic as module 7.1, applied to a company's cap table instead of a fund.

The common methods

Most funds use more than one method and reconcile the results.

SAFEs and convertible notes

Unconverted instruments are awkward to value: there's no share price, only a cap and a discount. Many funds hold them at cost until a priced round unless something clearly impairs the company, but the same fair-value thinking still applies. Whatever you do, your valuation policy should say it and say why.

Down rounds and quiet write-offs

When a company raises at a lower price, the new round is strong evidence and marks follow. The harder cases are companies that haven't raised in two years and are quietly running out of money: no new price exists to force the write-down. That's where stale marks hide, and LPs have learned to look for them. It's also why DPI — cash actually returned — has become the number LPs trust most (module 7.3).

Policy and process

What makes a mark defensible isn't a clever model. It's process:

1. A written valuation policy, adopted by the GP and disclosed to LPs, setting out the methods and when each applies.
2. Consistency. The same approach quarter to quarter, with any change explained.
3. A valuation committee that reviews marks, ideally including people who didn't lead the deal.
4. Documentation of the evidence behind each mark.
5. Audit. The annual audit tests year-end marks, which is why auditors will ask for everything above.

Some LPAs also give the LP Advisory Committee a role in reviewing valuations.

▸Worked example — one position, three situations

The fund invested $3M in a Series A at $2.00 a share. Twelve months later:

Situation	Reasonable direction	Why
New Series B at $4.00, led by an outside fund on standard terms	Up, calibrated to the fund's Series A shares rather than simply $4.00	Strong new evidence of value, but the fund's shares sit behind the B
No new round; company on plan with 20 months of cash	Hold near cost	Nothing material has changed
Insider-led bridge at $2.00 with a 2x liquidation preference; 5 months of cash	Down	The flat headline price hides a worse position for existing shares, plus runway risk

What this means for you

In a fund ops seat you'll own the valuation calendar, the evidence file and the auditor relationship, even where the partners own the judgments. On the investing side you'll be asked to justify the marks on your companies. "The last round was at X" is where that conversation starts, not where it ends.