Private Fund NAV: How an Unlisted Portfolio Is Valued

A private fund's net asset value is the total carrying value of the holdings it still holds, an estimate made on a stated date rather than a price anybody has paid. Nilgiri Growth Partners Fund II, invented, carried Rs 2,82,00,00,000 across five unsold holdings at the end of its Year 9 Quarter 2. Cash already distributed sits outside that figure entirely.

Two ideas decide how a private fund's report should be read. The first is that a carrying value is a measurement rather than a transaction. Nobody paid it, nobody offered it, and it was arrived at on a stated basis on a stated day by a named person. The second is that a fund's value has two halves, the cash it has already returned and the estimate it still holds, and almost every argument about private fund performance turns out, once it is unpicked, to be an argument about which of those two halves somebody is quoting.

The worked case throughout is Nilgiri Growth Partners Fund II, invented, a closed-end vehicle managed by Nilgiri Alternatives Advisors Private Limited, invented, and settled as a trust whose trustee is Nilgiri Trusteeship Services Private Limited, invented. The fund is registered as an Alternative Investment Fund with the Securities and Exchange Board of India. Twelve investors and the manager between them committed Rs 5,00,00,00,000. The fund bought nine companies. Every figure below belongs to that one fund at one stated moment, the end of its Year 9 Quarter 2. That moment is 8.50 years after its final close, and it leaves six quarters of the fund's ten year term still to run.

What is a net asset value when there is no screen and no unit price?

Start somewhere the answer is already known. Consider a two bedroom flat. Four people asked what it is worth will give four numbers, and three of them will be delivered with real confidence. None of those four numbers is a price. The flat has a price on exactly one day, the day somebody sits down, makes an offer, and the two parties either shake hands or they do not. Until that day arrives there is no price at all. The price is not hidden, and nobody is getting it wrong. The price has simply not been made yet.

Consider a bank that asks the owner today to put a value on the flat. The answer is not a refusal. The owner says something like this: two flats in the building changed hands last year, mine is on a higher floor, so call it this much. The owner's answer has three parts and every one of them matters. There is a basis, being the two flats that changed hands. There is a date, being today rather than last year. And there is a person, being the owner rather than a valuer the bank appointed. An estimate with a basis, a date and a person attached to it is a legitimate and useful thing; the mistake is only ever in treating it as a receipt.

A private fund does exactly that, at scale, under contract, with somebody else's money. On one named day, a fund's net asset valueThe total carrying value of what a fund still holds, on a stated date. is the total of the carrying valueThe value a holding is recorded at, which is an estimate rather than a price paid. of every holding it has not yet sold. At the end of its Year 9 Quarter 2, Nilgiri Growth Partners Fund II, invented, still held five companies and carried them at Rs 2,82,00,00,000 between them. The Rs 2,82,00,00,000 is the fund's net asset value, and there is nothing else inside it. The cash it has already handed back to its investors is not in that figure. The money still promised but never called is not in it either.

Set that against the money that has actually gone in. Paid in capitalEvery rupee the fund has actually called from investors, for holdings, fee and expenses alike. is every rupee a fund has ever called from its investors, and for Nilgiri Growth Partners Fund II, invented, at the end of its Year 9 Quarter 2 that is Rs 4,80,00,00,000, drawn across seventeen separate calls. Put Rs 2,82,00,00,000 of net asset value beside Rs 4,80,00,00,000 of paid in capital and the fund looks, at a glance, to be worth far less than it has cost. The glance is wrong, and the reason is worth stating carefully rather than waving away. A net asset value counts only what is still held. A paid in figure counts everything ever put in, including money that came back out again years ago.

There is a second thing worth knowing about that comparison. The year by year shape is covered separately, and two points of it are enough here. At the end of its Year 1, Nilgiri Growth Partners Fund II, invented, reported total value of 0.88 times what had been paid into it. At the end of its Year 9 Quarter 2 the same invented fund reported 1.50 times. Only those two points are given here, and the honest reading of the first is that a fund whose reported value sits below what has been paid into it is not thereby a fund where anything has gone wrong. For its first several years a closed-end private vehicle has spent money buying businesses and has sold none of them, and the running cost of the vehicle has been drawn on top of that. The shape follows from the arithmetic rather than from performance.

Why does a closed-end fund report one total and not a value per unit?

Here is a question almost nobody asks, and asking it teaches more than the answer looks like it should. A fund that can be bought on any working day publishes a value per unit. A closed-end private fund publishes a total and stops. Why the difference?

Because a per unit figure exists to price a transaction. A per unit figure is the number somebody buys at and the number somebody else cashes out at. So it has to be struck for every dealing day, and struck to a level of precision that survives being transacted on. Where nobody can buy at it and nobody can sell at it, a per unit figure has no work to do. A closed-end private fund has no dealing day at all, so the figure it reports is a measurement of the whole rather than a price for a slice of it.

Nilgiri Growth Partners Fund II, invented, has twelve investors and the manager, and not one of them can subscribe or redeem on any day. Their money came in when it was called and it goes out when the fund sends it. Each investor is told its own share of the fund by a capital account statement, worked from its own commitment and its own contributions, and what that statement contains is covered separately. The fund-level figure at the end of its Year 9 Quarter 2 is one number, Rs 2,82,00,00,000, and it is a total of five carrying values rather than a rate at which anybody may deal.

Consider a housing society that has its own generator, its own water tanks and a plot of land at the back. The society can state what those three things are worth together. Because there is no such transaction, the society does not publish a price per flat at which anybody may buy in this afternoon. The total is real. There is no dealing, so there is no dealing price.

How does a holding nobody can sell on a screen get a value at all?

How Private Funds Report NAV and Fair Value

The answer has three parts and a private fund's report should make all three findable. A carrying value is an estimate of fair valueAn estimate of what a holding would change hands for between willing parties on the valuation date., meaning what the holding would change hands for between willing parties on the valuation date. So the first part is the basis, being the reasoning used to reach that estimate. The second is the date. A fair value is always as at a day and never as at a season. The third is the person. Somebody made the estimate, and their name and their independence can be looked at.

Take those in turn on the invented fund. The basis is a fair value basis, and how a valuer actually reaches one, what independence buys and what it does not, is covered separately. The date is the end of Year 9 Quarter 2, and the date matters more than readers expect. Nothing in Nilgiri Growth Partners Fund II was revalued in the two quarters after its Year 8 year end, so the Rs 2,82,00,00,000 it carried at the end of its Year 9 Quarter 2 is the Year 8 year end mark carried forward unchanged, and a reader who does not notice that has silently assumed a fresher figure than the one they are holding. The person is Palani Valuation Advisors LLP, a limited liability partnership acting as the independent valuation agent. The firm values every unrealised holding annually, and the manager marks quarterly between those valuations. Kolar Fund Services Private Limited, invented, is the administrator, and it strikes the net asset value from those marks.

One consequence of that machinery deserves a single sentence: a mark made from information that arrives on a quarterly and annual timetable moves later than a price made from information that arrives continuously. Why that gap exists, and what it does and does not license anybody to say, is covered separately.

Now the thing worth carrying away from this section. A reader who has only ever heard private marks discussed as a source of suspicion will expect every one of them to sit above cost. Consider what this invented fund actually reported. Holding 4, Bhavani Speciality Chemicals Private Limited, cost Rs 60,00,00,000 including a follow-on and was carried at Rs 1,08,00,00,000 at the end of Year 9 Quarter 2. The mark is 1.80 times its cost. Holding 6, Vaigai Edutech Private Limited, cost Rs 30,00,00,000 and was carried at Rs 21,00,00,000 on the same day. The mark there is 0.70 times its cost. Same fund, same date, same valuation agent, and one of the two is carried Rs 9,00,00,000 below what the fund paid for it. An estimate that can only move one way is not an estimate, and this one moves both.

What is inside the Rs 2,82,00,00,000, holding by holding?

A net asset value is built by addition, so a net asset value can always be taken apart again. Taking one apart is the single most useful thing a reader can do with it. Nilgiri Growth Partners Fund II, invented, bought nine companies for Rs 4,00,00,00,000 of acquisition cost between its Year 1 and its Year 5. By the end of its Year 9 Quarter 2, four of those nine had gone completely, one had been part sold, and five still sat inside the fund.

Here is the whole book. The last column is the net asset value and nothing else on the table is, so read that column first.

Three things in that table are worth pausing on. The first is the shape of the net asset value column. Five entries, four blanks. The Rs 2,82,00,00,000 is an estimate of five businesses and says nothing whatever about the four that have gone. The second is holding 5, Palar Foods Private Limited, invented, which cost Rs 35,00,00,000 and was written off in full in Year 6 Quarter 4: it contributes nothing to either the cash column or the carrying value column, and a reader looking only at the total would never meet it. The third is holding 9, Indravati Packaging Private Limited, which appears in both columns at once. In Year 8 Quarter 3, 40 per cent of the position was sold for Rs 22,00,00,000, and the remaining 60 per cent, whose cost is Rs 15,00,00,000, is carried at Rs 33,00,00,000. One holding, two kinds of number, and only one of them has met a buyer.

What is the difference between net asset value and total value?

One distinction unlocks everything that follows, and it is worth reading twice. Net asset value is what a fund still holds. Total value is what it still holds plus everything it has already handed back. The two halves are not two versions of the same measurement: one of them is money that has arrived in somebody's bank account and the other is an estimate of five businesses that have not been sold.

Most households run this arithmetic without calling it that. A household that bought gold over twenty years, sold some of it for a daughter's education and still keeps the rest in a locker has exactly two figures. The first is what the sold portion actually fetched, a receipt that cannot be argued with. The second is what the locker holds today, a jeweller's estimate on a Tuesday. The two added together are the total value of what that household ever bought. Nobody in that household would confuse the two halves, and yet the same reader will happily confuse them on a fund report.

For Nilgiri Growth Partners Fund II, invented, at the end of its Year 9 Quarter 2 the two halves are these. Cash already distributed to investors across four payments: Rs 4,38,00,00,000. Residual valueThe part of a fund's value that is still held rather than already returned in cash., being the net asset value: Rs 2,82,00,00,000. Add them and total value is Rs 7,20,00,00,000. Of that, 60.8 per cent has been received by somebody and 39.2 per cent has not been received by anybody. Every rupee of the Rs 4,38,00,00,000 was paid in cash in the quarter following the quarter the fund received it, and every rupee of the Rs 2,82,00,00,000 is a mark.

So is this fund at 1.80 times, 1.50 times or 1.44 times?

All three, on the same day, and that is not a trick. The denominator is the single most load-bearing thing on a private fund's report, and it is almost never printed next to the number.

A multiple is a division. The top of it, here, never changes: the Rs 7,20,00,00,000 of total value that Nilgiri Growth Partners Fund II, invented, reported at the end of its Year 9 Quarter 2. The bottom changes, and the fund has three perfectly reasonable bottoms available to it. Divided by the Rs 4,00,00,00,000 of acquisition cost it is 1.80 times. Divided by the Rs 4,80,00,00,000 of paid in capital it is 1.50 times. The 1.50 is the figure called total value to paid inCash returned plus residual value, divided by capital paid in., and the one an investor's own statement shows. Divided by the Rs 5,00,00,00,000 of commitments it is 1.44 times. Almost nobody quotes 1.44, and that is exactly why a reader should know it exists.

The same fund on the same afternoon is 1.80, 1.50 and 1.44, depending only on which of the three denominators somebody picked, so a multiple stated without its denominator has said nothing at all. That is not dishonesty. All three are correct arithmetic on the same numerator. The reader's job is to make the denominator visible, and where a report does not state it, the question is worth asking.

The distance between two of those three is a specific rupee amount rather than a matter of opinion, so the two are worth putting side by side. Nilgiri Growth Partners Fund II, invented, put Rs 4,00,00,00,000 into nine companies. The fund drew Rs 4,80,00,00,000 from its investors. The Rs 80,00,00,000 of difference never went into any company at all: it is the management fee and the fund's own expenses, drawn on top of the money that bought things. The Rs 80,00,00,000 is the entire distance from 1.80 times to 1.50 times, and there is nothing else in the gap. How that fee is charged, on what basis, and how its basis steps down over a fund's life, is covered separately.

What one addition is worth running on any private fund report?

There is a check here that takes ten seconds, needs no software and catches a whole class of error. Total value has exactly two halves, and the two halves must add to the whole. The check rests on nothing else.

Divide each half separately by the same paid in capital. Distributions to paid inCash returned divided by capital paid in, with no estimate in it. is cash returned over capital called: for Nilgiri Growth Partners Fund II, invented, at the end of its Year 9 Quarter 2 that is Rs 4,38,00,00,000 over Rs 4,80,00,00,000, being 0.9125. A report will usually print 0.9125 as 0.91. Residual value to paid in is carrying value over capital called: Rs 2,82,00,00,000 over Rs 4,80,00,00,000, being 0.5875, usually printed as 0.59. Adding 0.9125 and 0.5875 gives 1.5000 exactly, the reported total value to paid in. The addition is the check every reader of a private fund report should run.

The check works for a plain reason. The numerators add by construction. Cash plus carrying value is total value, and dividing three numbers by the same denominator cannot break an addition. So a statement that gives all three without their reconciling has turned up something real rather than a rounding wobble. Either the headline has been computed on a different denominator, one of the three is as at a different date, or somebody has typed a number into the wrong row.

Which assumptions sit inside any figure an unlisted portfolio reports?

How to identify Alternative-Investment Reporting Assumptions

Six questions, and none of them is a criticism of anybody. Each is a question whose answer changes what a figure means, and a reader who cannot answer all six does not yet know what they are looking at. The six are worked in order on whatever pack is to hand.

One, the valuation date. Which day is the figure as at, and has anything been revalued since? For Nilgiri Growth Partners Fund II, invented, the figures in this guide are as at the end of its Year 9 Quarter 2, and nothing was revalued in the two quarters after its Year 8 year end, so the Rs 2,82,00,00,000 is the Year 8 mark carried forward. The carry-forward is not concealment. Annual valuation with quarterly marking in between is what this fund contracted for. The staleness is simply a fact a reader ought to know they are holding.

Two, who made the mark. The estimate came from somebody, and their name and their relationship to the manager are worth knowing. In this fund the independent valuation agent is Palani Valuation Advisors LLP, and the firm values every unrealised holding annually. The manager marks quarterly between those valuations. The meaning of independence, and its limits, is covered separately.

Three, the denominator. Cost, paid in or commitment, as already worked through: 1.80, 1.50 and 1.44 times, all three being the same invented fund on the same day, the end of its Year 9 Quarter 2.

Four, gross or net. Whether a rate of return is stated before or after the management fee, the expenses and the carried interest. Nilgiri Growth Partners Fund II, invented, reports a net internal rate of return of 8.3 per cent at the end of its Year 9 Quarter 2, over its own 8.50 years since final close. A gross figure and a net figure for the same fund over the same period are different numbers and they are not interchangeable.

Five, how much of the value has actually been sold. Of the Rs 7,20,00,00,000 of total value this invented fund reported at the end of its Year 9 Quarter 2, Rs 4,38,00,00,000 was realised in cash and Rs 2,82,00,00,000 has never been sold to anybody, being 39.2 per cent of the whole. Two funds can report the same multiple with completely different answers to this question.

Six, what any comparison is against. If a report sets the fund beside something, know what that something is. Nilgiri Growth Partners Fund II reports a public market equivalent of 1.05, computed by the method Kaplan and Schoar set out, against a reference broad equity index of the fund's own construction rather than any published index. A comparison whose benchmark is unnamed is not a comparison.

How can a fund be short of returning capital and above its preferred return at once?

Here are two sentences about Nilgiri Growth Partners Fund II, invented, at the end of its Year 9 Quarter 2. Both are exactly true. The gap between them is where most misreadings of a private fund report begin.

Sentence one. The fund has distributed Rs 4,38,00,00,000 to its investors against Rs 4,80,00,00,000 it has drawn from them. The fund is therefore Rs 42,00,00,000 short of returning the capital it called. Because of that it has paid no preferred return, no catch-up and no carried interest at all, and the manager has received nothing beyond its management fee. Its clawback exposure is nil and the escrow behind that clawback is empty.

Sentence two. The same fund on the same day reports total value of 1.50 times what has been paid into it, and a net internal rate of return of 8.3 per cent over its own 8.50 years since final close. The 8.3 per cent sits above the fund's own preferred returnA rate the investor class receives before the manager receives any share of profit. of 8.0 per cent a year.

A reader meeting those two sentences together usually assumes one of them is wrong, or that something is being withheld. Neither is true. The contracted order in which a fund pays money out runs on cash actually received. A rate of return counts an estimate as well, and Rs 2,82,00,00,000 of this fund's value has never been sold to anybody. That single distinction resolves the whole apparent contradiction. A mark is not money, so the order of payment cannot pay out of one. The fund genuinely still holds five businesses, so the rate of return cannot ignore the mark either. Pretending the fund holds nothing would be the greater distortion.

The everyday version is not far away. A household that has repaid Rs 4,38,000 of a Rs 4,80,000 loan is Rs 42,000 short, and a car standing in the driveway worth Rs 3,00,000 does not make the lender paid. The car is real. The car is simply not a repayment until somebody sells it. The contracted order of payment, and how the tiers of it actually work, is covered separately. The two figures disagree for one reason: one counts receipts, the other counts an unrealised holdingA holding still held, so its value is a mark rather than a receipt. at the value somebody estimated for it.

What does a net asset value not say?

A figure this useful attracts more weight than it can carry, so the limits are worth stating plainly. A net asset value does not say what any holding will be sold for. The five unsold companies of Nilgiri Growth Partners Fund II have no sale price yet, and the fund's own record cannot supply one. A net asset value does not say when anything will be sold either, and this fund has six quarters of its ten year term remaining at the end of its Year 9 Quarter 2 with five holdings still unsold. Nor does a net asset value say whether an estimate will turn out to have been high or low.

A net asset value also says nothing about how the value is spread. Two funds can carry the same total across five holdings and be entirely different objects, one with the value spread evenly and one with two thirds of it inside two names. In this invented fund, holding 4 at Rs 1,08,00,00,000 and holding 8 at Rs 81,00,00,000 are 38.3 per cent and 28.7 per cent of the Rs 2,82,00,00,000 respectively, so two of the five carry 67.0 per cent of everything left. The concentration is visible only because the report lists the five separately. How far a report goes in listing what sits underneath a total is covered separately.

And a net asset value says nothing at all about the four holdings that have gone. Those four are the half of this fund's story that has actually been settled in cash. The most common analytical mistake with a private fund is not misreading its net asset value; it is forgetting that the net asset value is only one of the two halves and then comparing it with something that contains both.

Who actually reads this, and what do they do with it?

More people read a private fund's reporting pack than might be guessed, and almost none of them are the people who committed the money. Each of the four does something different with the same report, so all four are worth taking in turn.

An investment committee member deciding whether to commit to a manager's next fund reads the current one's pack and immediately splits it into the two halves. How much has come back in cash, and how much is still a mark? For Nilgiri Growth Partners Fund II, invented, at the end of its Year 9 Quarter 2 the answer is Rs 4,38,00,00,000 and Rs 2,82,00,00,000. A record that is heavily unrealised is not thereby a worse record, but it is a different kind of evidence and the committee has to know which kind it is holding.

A monitoring analyst inside an institution that has already committed does something narrower and more mechanical: they run the addition. Distributions to paid in plus residual value to paid in against the headline multiple, quarter after quarter, and then they look at what moved between quarters and ask what produced the movement. Between this invented fund's Year 8 year end and the end of its Year 9 Quarter 2, the reported multiple moved from 1.51 times to 1.50 times, and the entire reason is that Rs 2,20,00,000 more was drawn while no value was added to anything. The denominator grew. Nothing fell.

A lender being asked to lend against a private fund position wants the opposite emphasis, and asks what could be turned into cash and when. The Rs 2,82,00,00,000 is security only as an estimate of five businesses that would each have to find a buyer. This fund's own history shows what finding a buyer takes: the four holdings it fully realised were held 5.75, 4.75, 5.75 and 3.75 years, averaging exactly 5.00 years. That average is a fact about these four holdings and not a claim about how long anything is usually held.

And a student or a new analyst reads it to learn the vocabulary properly. The single habit worth building is to let no multiple past without naming its denominator out loud, and no total past without splitting it into cash and estimate. Those two habits, applied to any private fund pack in any country, catch most of what goes wrong in reading one.