NAV calculations for PE funds: the quarterly drill

NAV calculation for a PE fund is structurally different from NAV calculation for a listed equity fund or a mutual fund. The portfolio is illiquid, the valuations are judgmental, and the inputs come from the deal team rather than from a market data feed. SEBI's 2025 amendment moved NAV reporting to monthly for all AIFs, but the substantive quarterly valuation cycle remained largely as it was.

This article walks through the SEBI-required methodology, the operational cadence, the methodology choices, and the common errors that surface in audit and LP reporting.

The SEBI framework

SEBI requires AIFs to value their assets at fair value. For Cat I and Cat II funds, the valuation methodology must be documented in the PPM and applied consistently across the fund's life. The valuation must be performed by an independent valuer for the fund-level NAV and reviewed by the fund's valuation committee.

The five permitted methodologies under SEBI guidance and Ind AS 113 (Fair Value Measurement) are:

Discounted Cash Flow (DCF). Project the portfolio company's future cash flows and discount at an appropriate rate to derive the equity value. Used for mature companies with stable cash flow profiles.

Market Multiples (Comparable Companies). Apply trading multiples of comparable listed companies to the portfolio company's revenue, EBITDA, or earnings. Used for portfolio companies with listed comparables in similar sectors.

Recent Transaction. Use the price of a recent transaction in the portfolio company's securities (typically a recent round of financing) as the fair value, adjusted for the passage of time and any structural differences.

Cost. Hold the investment at its original cost. Used only for investments less than 12 months old or where no meaningful valuation event has occurred.

Net Asset Value. Used primarily for fund-of-fund positions or for asset-heavy portfolio companies (real estate, infrastructure).

Most PE funds use a combination — DCF and market multiples for mature portfolio companies, recent transaction for companies that have raised follow-on rounds, cost for new investments.

The quarterly process

Week 1: Valuer engagement. The independent valuer is engaged for the quarter (typically the same valuer engaged at the start of the fund year). The valuer's scope is confirmed and any methodology changes from the prior quarter are flagged.

Week 2-3: Deal team inputs. The deal team for each portfolio company prepares the valuation inputs: latest financials, latest management forecast, latest comparable transactions, any material events since the prior quarter. The deal team's valuation recommendation is documented in a valuation memo.

Week 4: Valuer review. The valuer reviews the deal team's inputs and recommendations. The valuer applies the documented methodologies, often with adjustments to the deal team's assumptions. The valuer's working becomes the basis for the quarter's valuation.

Week 5: Valuation committee review. The fund's valuation committee (typically the managing partner, the head of finance, and an external advisor) reviews the valuer's working. The committee can accept, request adjustments to, or escalate the valuation. Disputed valuations are resolved between the deal team, the valuer, and the committee.

Week 6: Audit committee sign-off. The audit committee reviews the valuation committee's conclusions and confirms the quarter's NAV.

Week 7-8: Custodian validation and LP reporting. The custodian validates the underlying holdings reconcile to the valuation. The fund administrator prepares the LP report including the quarter's NAV.

Total cycle: 8 weeks from quarter-end to LP report distribution. This is the operational reason that LP reports for Q1 (ending March 31) typically reach LPs in late May or early June.

Methodology choice and the consistency question

The PPM commits the fund to a specific methodology framework. Within that framework, the methodology applied to each portfolio company can vary based on the company's stage, sector, and available data. Two consistency requirements matter.

Within-company consistency across quarters. If a portfolio company was valued using market multiples in Q1, it should be valued using market multiples in Q2 unless there is a specific reason to change. A methodology change mid-fund is a flag for auditors and SEBI examiners.

Cross-company consistency at the fund level. If two portfolio companies are similar (same sector, same stage, similar revenue profile), they should be valued using similar methodologies. A fund that uses market multiples for one company and DCF for another in the same situation creates a methodology inconsistency that is hard to defend.

Common errors and how they surface

Stale comparable set. The market multiples methodology uses comparable listed companies. The comparable set needs to be refreshed each quarter — companies that have been acquired, delisted, or moved away from the portfolio company's sector should be removed; new comparables should be added. Funds that maintain a static comparable set for years end up with multiples that do not reflect current market conditions.

Optimistic management projections. The DCF methodology depends on management's revenue and margin projections. Management projections are typically optimistic — that is the nature of management. The valuer should haircut the projections based on the fund's experience with the portfolio company. Funds that take management projections at face value end up with NAVs that are systematically high.

Ignored impairment indicators. A portfolio company that has missed its revenue plan by 30% in two consecutive quarters has an impairment indicator. The NAV should reflect a lower valuation, either through a methodology change or through a haircut to the existing methodology output. Funds that do not flag impairments at the right time end up with sudden NAV write-downs later, which is harder to explain to LPs than gradual recognition.

Mid-quarter events not reflected. Material events between the quarter-end and the LP report date should be reflected in the NAV. A portfolio company that signed a major customer contract in early Q1 affects the Q1 NAV even though the contract is signed after March 31. Similarly, a portfolio company that lost a major customer in early Q1 affects the Q1 NAV. The valuation methodology should incorporate these events through the 'subsequent events' adjustment.

The audit committee's role

The audit committee is the last line of defence on NAV. The committee typically has three members: an external chartered accountant (chair), an independent director, and a senior fund operations professional. The committee reviews the valuation committee's conclusions, the valuer's working, and the deal team's inputs.

The audit committee can request additional analysis, escalate specific portfolio company valuations, and ultimately decline to sign off on a NAV that the committee believes is not defensible. The decline is rare but powerful — it forces the fund to either change the NAV or document the disagreement in the quarterly report.

Monthly NAV: the practical reality

SEBI's 2025 amendment requires monthly NAV reporting. The full quarterly valuation process is too heavy to repeat monthly. The standard solution: a monthly NAV that reflects only realised events (exits, write-downs, write-ups based on specific identifiable events) plus the prior quarter's valuation for unchanged positions. The full revaluation happens quarterly.

This hybrid approach is consistent with the spirit of SEBI's regulation (LPs get monthly NAV visibility) without the operational burden of full monthly valuations. SEBI has not formally endorsed the approach but has not objected to it either. We expect formal SEBI guidance on this in the 2026 amendment cycle.

One number, eight weeks of work

The quarterly NAV is the single most-scrutinised number a fund produces. It drives LP perception of fund performance, GP carry distributions, and the fund's marketing narrative for future fundraises. The eight-week process from quarter-end to LP report is operationally heavy but the alternative — a quicker, less rigorous process — produces NAVs that do not survive audit scrutiny. We work through this with funds during fund formation and during operational reviews. The funds that get the NAV process right tend to have clean audits, calm LP relationships, and the ability to defend specific valuations under examination. The funds that do not have rolling disputes between deal teams, valuers, and auditors that distract from the actual investing work.