As Evergreen private equity and infrastructure funds offer monthly dealing while relying on infrequent and delayed underlying valuations, the integrity of interim NAVs becomes a critical issue for investor fairness.

Need For Monthly NAVs

The proliferation of Evergreen products across private equity and infrastructure equity requires more frequent data and valuations, given monthly subscriptions and quarterly redemptions. Existing practices still rely on the quarterly valuations from investee funds, often with significant delay to quarter end (45-60 days). This means, without adjustment, investee fund valuations can be up to 5-6 months stale. As a result, there is a high likelihood that the interim monthly NAVs are incorrect, disadvantaging either new investors (overvalued NAV), or existing investors (undervalued NAV). Eventually regulators will start looking at this uneven treatment of investors.

Inconsistent Practices

Reviewing more than a dozen prospectuses of private equity and infrastructure funds, the best we can say is that the practices are “bespoke”. There is no market standard for how NAVs are adjusted between receipt of quarterly valuations from investee funds. For fund interests (primaries and secondaries), there should be a market adjustment factor to account for dynamic valuation changes month to month. Current practices adjust for net capital changes and FX movements, but the application of a market adjustment factor seems more ad hoc and not explicitly defined or disclosed if applied consistently. For direct portfolio company holdings, a less formal valuation update takes place in interim monthly updates.

privateMetrics and infraMetrics Market Adjustment Factor

Both privateMetrics and infraMetrics produce monthly asset level indices that capture the systematic risk of the private equities and infrastructure equities markets, respectively. The monthly returns of the broad market indices can be used as a proxy or market adjustment factor to update the value of fund interests or a portfolio of co-investments during interim months. This ensures that the interim NAVs used to accept new monthly subscriptions adjust for broad market movements in private and infrastructure equities. Additional idiosyncratic components known to the Advisor can further adjust the NAVs. Both privateMetrics and infraMetrics indices produce monthly data at T+10¹, comfortably aligning with the T+21/22 monthly settlement (NAV release) observed at many semi-liquid funds.

Avoids Unfair Treatment

Using a well-defined and disclosed process for updating monthly NAVs can help to avoid concerns over gaming. In the current setup, some parties may be more aware of valuation practices than others. The playing field should be level for all participants, including wealth and retail, so that certain parties do not get to enter before a revaluation, or certain gains are released in the fund.

Footnotes:

¹Month-end plus 10 days vs settlement of month-end plus 21-22 days.