The paper that follows is an observation, not a prescription. It describes the gap between the way the late-stage private NAV is produced today and the standard a defendable institutional price would require. It catalogues the regulatory, accounting, audit, and academic record that has already documented the gap. It sets out the six pillars an integrated standard would need to satisfy.
The standards exist. The integration does not. SEC Rule 2a-5, IRC §409A, AIFMD Article 19 and AIFMD II, the FCA's March 2025 review, the PRA's April 2024 thematic letter, IOSCO's 2025 consultation, ASC 820 and IFRS 13, the IPEV Guidelines, the AICPA Practice Aid, ILPA's reporting templates, and the Big Four audit firms all hold pieces of the answer. No single regime holds the integrated whole. The companion paper, The defendable price requirements, operationalises the integration.
This is the first paper in a Defendable Price series. The CTAs at the end invite correction, addition, and counter-argument.
Where this paper sits
This paper is one of a set covering late-stage private-market pricing from two angles: the Reliable Decision Surface (can you trust how the number was produced?) and the Defendable Price (does the number survive institutional scrutiny?), with the open SII standard above both.
On the two angles, this paper holds Angle B: why the private NAV is not yet a defendable price, and what would make it one. Its operational companion is The defendable price requirements. The production methodology behind the inputs is documented on Angle A, in The Decision Surface.
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The late-stage private NAV is not yet a defendable institutional price. This is a structural observation, not a moral one. The number reported by a GP at quarter-end is produced through a process that is infrequent (quarterly, sometimes annual), lagged (released 45 to 90 days after quarter-end), subjective (Level 3 inputs under ASC 820 and IFRS 13), self-marked (the GP is the assessor), smoothed (autocorrelated returns that suppress measured beta and inflate measured alpha), and frequently disconnected from the price at which the same stake clears in the secondary market.
The weight being placed on that price is rising fast. NAV is no longer a pure reporting metric. It is the fee base for management and carry. It is the collateral value for NAV-secured leverage. It is the regulatory carrying value for insurers under Solvency II and the allocation denominator for pension funds. In evergreen, interval, and BDC structures, NAV is the subscription and redemption price. The thing being priced has become institutional infrastructure. The pricing has not.
Six observations follow. The structural evidence that the current price is not defendable. The standards landscape as it stands today. The implications cascading through fees, capital, leverage, and retail wrappers. The six pillars an integrated standard would have to satisfy. Where the implications land for each side of the market. And an invitation to participants who would correct or contest the read.
Six observations point in the same direction. They are drawn from the regulatory record, the academic literature, and the secondary market itself. Taken alone, each describes a real weakness in how private NAVs are produced today. Taken together, they describe a price that does not yet meet the institutional bar.
Observation one: the secondary market discount. LP-led secondary transactions cleared at an average 89% of NAV in 2024, with venture and growth stakes routinely clearing at 60 to 70% of NAV. Jefferies reported $162bn of secondary volume in 2024, up 45% on 2023. The price at which the same stake actually transfers is now public, persistent, and material. GP-reported NAVs have not yet incorporated the signal.
Observation two: volatility laundering. Mark Anson's 2024 study in the Journal of Portfolio Management documented that appraisal-based marking systematically suppresses measured beta and inflates measured alpha. The CFA Institute and Morningstar have both adopted the phrase "volatility laundering" to describe the effect. The smoother return profile that allocators reference when justifying PE allocations is partly artefact. The bias affects asset allocation decisions directly.
Observation three: the enforcement record. The SEC has pursued repeated valuation-fraud actions against private fund advisers. Documented cases include manipulation of third-party pricing service inputs, billion-dollar overvaluations, and CCO/CRO charges. The Southern District of New York signalled in December 2025 a renewed criminal focus on schemes to materially inflate valuations and charge fees on an inflated asset base. The cases are evidence that the current framework permits the gap between mark and market to remain unexplained until someone gets caught.
Observation four: the FCA finding. The UK Financial Conduct Authority's March 2025 multi-firm review of 36 firms holding £3 trillion of global PE AUM identified systemic weaknesses in governance documentation, conflict-of-interest identification, functional independence of the valuation function, and ad hoc valuation processes. The FCA did not find misconduct. It found that the institutional process behind the number is not yet at the procurement bar institutional buyers and regulators are now applying.
Observation five: the PRA's bank exposure letter. The Bank of England's Prudential Regulation Authority sent its April 2024 "Dear CRO" letter to UK banks identifying gaps in their risk management frameworks for exposures to PE. The sector grew from $2tn to $8tn over a decade. The PRA explicitly flagged capital-call subscription facilities and NAV loans as transmission channels. The collateral value used to size NAV loans is the same opaque, lagged, self-marked NAV that academic and regulatory literature has been flagging. Bank capital is now exposed.
Observation six: the FASB letter. In April 2025 a coalition of investor advocates wrote to FASB asking it to reconsider the NAV practical expedient under Topic 820. The expedient currently allows secondary fund buyers to acquire a stake at, say, 80% of GP-reported NAV and immediately mark it up to 100% on their own books. The letter notes that secondary transactions in private fund interests have increased substantially in both volume and frequency. The accounting profession is now formally questioning a key load-bearing piece of the framework.
The six observations converge. The current NAV process produces a price the institutional market is increasingly unable to defend in the contexts where defensibility matters: secondary transactions, fee crystallisation, collateral valuation, regulatory capital, and subscription and redemption pricing.
The standards a defendable price would need to satisfy already exist. They sit across multiple regimes, each covering a slice. The fragmentation is the friction.
SEC Rule 2a-5 governs fair-value determinations for registered investment companies. Adopted December 2020. Establishes a board-or-designee fair-value regime with documented process, methodology testing, oversight of pricing services, and segregation of duties. Aligns the Investment Company Act definition of "readily available" market quotations with US GAAP. Applies directly to BDCs and registered private-asset wrappers. Does not apply to 3(c)(1) or 3(c)(7) private funds.
IRC §409A and the Treasury safe harbour. Establish the litigation-grade benchmark for defendable private-company common stock pricing: qualified independent appraiser, written report, AICPA-Practice-Aid-compliant methodology (OPM, PWERM, CVM), 12-month or material-event recency, and records retention. Used by every venture-backed company in the US. Does not extend to fund NAV.
The SEC Private Fund Adviser Rule, August 2023. Partially vacated by the Fifth Circuit in June 2024. Of relevance: required independent fairness or valuation opinion for all adviser-led secondary transactions. The rule was vacated. The policy intent did not disappear. ILPA preserved the templates as voluntary industry standards. Top-quartile LPs increasingly require it in side letters.
AIFMD Article 19 and AIFMD II. EU alternative investment funds must establish appropriate and consistent procedures for proper, consistent, and independent valuation, performed either by an external valuer or by a functionally separate internal function. The AIFM remains liable regardless of outsourcing. External valuers carry liability for negligence or intentional failure. AIFMD II, in force from April 2024 and to be transposed by Member States by April 2026, expands disclosure obligations.
The FCA March 2025 multi-firm review. The clearest regulatory diagnostic of current PE valuation practice. Identified eight themes: governance, conflicts, independence, policies, frequency, transparency, methodology, third-party advisers. Did not impose new rules. Made expectations explicit.
The PRA April 2024 "Dear CRO" letter. Set bank-side expectations for risk management of PE exposures, including NAV-secured leverage. Required CRO benchmarking and gap analysis by August 2024. The first major prudential intervention on PE NAV opacity.
ECB, IMF, and ESRB macro-prudential reporting. Financial Stability Review (May 2024), GFSR (April 2024), NBFI Risk Monitor (2025). Collectively framed PE NAV opacity as a systemic concern. Documented the leverage chain (capital-call lines, NAV facilities, SPV layers, portfolio company debt) and the way smoothed marks artificially boost reported risk-adjusted returns.
IOSCO 2025 consultation. Proposed 13 updated recommendations for valuation of collective investment schemes. Covers governance under stressed market conditions, conflicts, fair value, back testing, use of third-party valuation service providers, stale valuations, and record keeping. Intended to update the 2007 hedge-fund and 2013 CIS principles.
IPEV Guidelines, December 2022 and December 2025 update. The de facto global private-capital methodology standard. Establishes fair value as the basis, calibration as required, methodology hierarchy of market multiples and DCF, and treatment of complex capital structures, distressed transactions, and post-IPO restrictions. The 2025 update adds guidance on ESG and use of AI in valuation.
AICPA Practice Aid. The operational manual for private-company valuation. Prescribes the OPM, PWERM, CVM allocation methods and the documentation requirements. The auditor's reference.
ASC 820 and IFRS 13. Define fair value as the exit price in an orderly transaction between market participants at the measurement date. Establish the Level 1, 2, 3 hierarchy. Require sensitivity and methodology disclosure. The accounting foundation.
ILPA templates and NAV facilities guidance. Reporting Template and Performance Template (January 2025), NAV-Based Facilities Guidance (2024), Principles 3.0. The LP-side disclosure baseline.
Solvency II and the LTEI framework. EU insurer capital framework. Long-Term Equity Investment treatment cuts the equity SCR from 49% plus symmetric adjustment to 22% for qualifying private equity investments. Capital efficiency depends on reliable carrying value.
Each regime covers a slice. The boundaries do not align. The integrated whole, where defendable pricing is constituted from process, methodology, frequency, independence, disclosure, and calibration to observable transactions, exists nowhere as a single binding standard. The companion paper sets it out as one operational framework.
The pricing gap is not abstract. It cashes out, in real money and real regulatory capital, across the institutional landscape. Five implications are visible now.
Fees on inflated bases. Management fees are charged on committed capital during the investment period and on NAV thereafter. Carried interest crystallises against unrealised marks. In evergreen and BDC vehicles, NAV is directly the fee base. Inflated NAV produces inflated fees. The SDNY's December 2025 framing of the criminal liability theory makes the link explicit. The enforcement cases are the visible tip of the structural exposure.
The denominator effect. When public markets fall and private NAVs lag, the share of the portfolio in private assets mechanically rises beyond target. More than half of US public pension funds exceeded their PE allocation targets in early 2025. Jefferies reported LPs sold PE stakes at an average 81% of NAV in 2022. A CFA Institute analysis quantified the implicit overstatement at roughly 3% of pension portfolio value, or 18 bps per year over 16 years. The portfolio-level overstatement is now structural.
NAV-secured leverage stacking on opaque collateral. NAV facility origination has grown rapidly. The collateral value used to size the loan is the same NAV the academic literature has been flagging. The PRA's April 2024 letter and ILPA's NAV-Based Facilities Guidance both signal that this transmission channel is now under regulatory attention. LP visibility into when NAV facilities are used, what they cost, and how they affect IRR remains uneven.
Solvency II capital efficiency at risk. European insurer LPs face capital charges on their PE holdings. LTEI qualification cuts the charge from 49% plus symmetric adjustment to 22%. The Solvency II Review, expected to come into force in January 2027, expands the LTEI scope. Capital efficiency depends on reliable carrying value. NAV opacity is now also a regulatory capital cost.
Retail wrappers carrying NAV as a transaction price. Evergreen, interval, tender-offer, and BDC structures price subscriptions and redemptions at NAV. Any lag or smoothing in NAV directly transfers wealth between exiting and entering investors. Q4 2025 saw redemptions as a share of NAV in non-listed BDCs nearly triple to 4.71%, and a major private credit BDC reported NAV writedowns of 19% in a single quarter. The retail-protection bar is rising in parallel with the volume of retail capital flowing in.
The thread connecting all five. A more defendable NAV produces lower fees on inflated bases, less denominator-effect rebalancing pressure, more reliable collateral, more efficient insurer capital, and safer retail subscription pricing. The economic value of closing the gap accrues to every side of the market.
Six pillars an integrated standard would have to satisfy. Each pillar is already present, in some form, in one or more of the existing regimes. The integration is what does not yet exist.
Pillar one: process and governance. A designated valuation function, separate from portfolio management, with documented authority. A valuation committee with recorded decisions, including the alternatives rejected and dissents noted. A conflict-of-interest map specific enough to be tested. A written policies-and-procedures manual reviewed annually. A material-risk assessment. An ad hoc valuation trigger framework with objective criteria. The skeleton is in SEC Rule 2a-5 and the FCA review. The detail level needs to rise.
Pillar two: independence. Either a credentialed external valuer with stated qualifications and explicit liability, or a functionally separate internal team with periodic third-party verification. Named appraisers holding ASA, ABV, CFA, or equivalent credentials. For GP-led secondaries, a mandatory independent fairness or valuation opinion with disclosure of business relationships in the prior two years. The model exists in §409A and in the vacated SEC Adviser-Led Secondary Rule.
Pillar three: methodology integrity. Triangulation of at least two methods (market multiples plus DCF as the dominant pair, with OPM or PWERM for complex capital structures). Calibration at inception so the model output equals entry price. Recalibration at each measurement date with updated inputs. Documented unobservable inputs with ranges. Sensitivity analysis. No "common stock equivalent" shortcuts for complex preferred stacks. No cost-basis carry beyond the brief period when cost remains the best evidence of fair value. The framework is in IPEV and the AICPA Practice Aid.
Pillar four: frequency. Quarterly minimum, with NAV struck no later than 60 days after quarter-end. Daily, weekly, or monthly for NAV-as-transaction-price vehicles (evergreen, interval, BDC). Mandatory re-marking on material events within 30 days. Public-comp dislocation triggers that automatically force ad hoc review. The §409A and ASC 820 logic, extended to frequency.
Pillar five: transparency and disclosure. Per-investment methodology disclosure. Unobservable inputs as ranges, not point estimates. Sensitivity tables. Period-over-period NAV bridge decomposing the change. Third-party valuer identity and independence status. NAV-facility disclosure at fund level. ILPA Reporting Template and Performance Template adoption. PwC's survey found 85% of managers disclose at the minimum required by ASC 820. That is not a defendable institutional baseline.
Pillar six: calibration to observable market signals. The single most material gap in the current regime. Mandatory consideration of recent secondary-market evidence on the underlying fund, sponsor, vintage, or sector. A rebuttable presumption that material divergences between secondary clearing prices and GP-reported NAV must be explained on the record, with auditor sign-off. Public-comp beta adjustment for daily and monthly NAV vehicles. Calibration to recent priced rounds with explicit decay logic. Reconciliation of continuation-vehicle pricing to prior NAV and to LP-led evidence. This is the pillar that converts the existing standards from defensive process into an active, observable, market-corroborated price.
The pillars are not aspirational. Each one is operationally specified in the companion paper. The framework sits closer to a procurement checklist than a regulatory proposal. The procurement question for an institutional LP, an insurer, an audit committee, or a regulator becomes: against this framework, where does this fund's pricing stand?
LPs. Defendable pricing reduces the gap between reported and realised performance, makes denominator-effect rebalancing more accurate, and reduces the surprise factor when distributions come back below NAV. LPs that build the framework into their re-up diligence shift the conversation with GPs from political to structural. The ILPA templates are the visible move. The procurement bar will keep rising.
GPs. The procurement bar is rising whether or not any individual GP responds. Funds with a documented, independent, calibrated process face lower friction at LP renewal, in audit, and in continuation-vehicle execution. Funds that do not face the same friction in reverse: slower closes, deeper LP scrutiny, harder fairness-opinion procurement, and larger discounts on the secondary market. The economic incentive runs in the direction of the framework.
Auditors and Big Four valuation practices. The auditor's role under ASC 820 and IFRS 13 is to opine on whether the fair value process is sound. PCAOB standards for auditing fair value already require testing. The next step is auditor opinion on material divergence between GP-reported NAV and secondary-market evidence. Big Four practices that build this into their methodology first set the bar for the rest.
Banks lending against NAV. The PRA letter set the expectation. Lenders are pushing it down to fund borrowers. The collateral value used to size a NAV facility has to satisfy the lender's own risk framework. The fund borrower whose NAV process meets the defendable bar will find the facility cheaper and the covenants looser.
Insurers under Solvency II. Capital efficiency depends on look-through to reliable carrying value. LTEI treatment, the Solvency II Review, and the prudent person principle all run through the underlying NAV. The insurer LPs whose GPs deliver granular, calibrated, frequent NAV data unlock the 22% SCR. The framework converts directly into regulatory capital relief.
Pension funds and endowments. Defendable NAV produces less denominator-effect rebalancing pressure and more accurate allocation. The CFA Institute work on volatility laundering, the FASB letter on the NAV practical expedient, and the SEC's evolving stance all point in the same direction. The allocator's question becomes: against the integrated framework, what is the real PE exposure?
Regulators. Each regulator already owns a piece. SEC, IRS, FCA, PRA, ECB, IOSCO, FASB, IASB, AICPA, IPEV, ILPA. The next step is alignment. The SEC's September 2025 SIFMA roundtable was an explicit signal of intent on the US side. AIFMD II Level 2 work continues in the EU. The IOSCO 2025 consultation is the multilateral channel. The framework offers a common reference all of them can converge on.
Retail wrappers. Evergreen, interval, BDC, ELTIF, and LTAF structures will continue to expand. The retail-protection question collapses to the same point: is the NAV at which retail subscribes and redeems defendable? The framework's answer is the same as the institutional answer, applied at higher frequency and with tighter verification.
This paper is a snapshot. Several of the regimes named have evolved since we last checked. Several practitioners have direct views that have not made it into the public record. Some may disagree with the framing.
We would rather get the framework right than get it published. The next version will incorporate corrections, additions, and counter-arguments from any participant who wishes to engage. Specific invitations:
The late-stage private NAV is not yet a defendable institutional price. The forces driving the gap are documented. The standards that would close the gap exist, in fragments. The integration is the work that has not yet been done. The companion paper sets out the operational framework.
The economic value of closing the gap accrues to every side of the market: LPs, GPs, auditors, banks, insurers, pension funds, regulators, and the retail vehicles that increasingly run on NAV. The procurement bar is rising whether or not any single participant responds.
The next versions of this paper will reflect what participants tell us. The work of defining the integrated framework is collaborative or it does not happen.
Arcanis is decision surface infrastructure for late-stage private companies. Built and used inside an active VC secondary fund. Available to host platforms via API, embed, white-label hub, and inspectable Excel.
The full methodology specification is documented in The Decision Surface: A methodology for scenario pricing in late-stage private markets.
The operational requirements framework is documented in the companion paper: The defendable price requirements.
The neutral standard that grades how reliably the underlying research is produced is the open SII Methodology Paper.
SEC Rule 2a-5 (Investment Company Act, December 2020). SEC Private Fund Adviser Rules (August 2023, partially vacated 2024). SEC enforcement record tracked by Sidley Austin, Proskauer Rose, Debevoise & Plimpton, and Clifford Chance. SEC Commissioner Mark Uyeda's remarks at the SIFMA Private Markets Valuation Roundtable, September 2025. SEC SDNY remarks on valuation fraud, December 2025. IRS Treasury Regulation §1.409A-1(b)(5)(iv). AICPA Practice Aid "Valuation of Privately-Held-Company Equity Securities Issued as Compensation" (2013, updated 2019). FASB Topic 820. IFRS 13. April 2025 investor advocate letter to FASB on the NAV practical expedient. AIFMD (Directive 2011/61/EU) Article 19. AIFMD II (Directive (EU) 2024/927). UK FCA "Private market valuation practices" multi-firm review, 5 March 2025. PRA "Dear CRO" letter on Private Equity Related Financing Activities, 23 April 2024. ECB Financial Stability Review, May 2024. IMF Global Financial Stability Report, April 2024. ESRB EU NBFI Risk Monitor, 2025. IOSCO CR/05/2025 consultation on Valuing Collective Investment Schemes. IPEV Guidelines, December 2022 edition and December 2025 update. ILPA Reporting Template, Performance Template, and NAV-Based Facilities Guidance (2024 to 2025). Anson (2024) "Amortizing Volatility Across Private Capital Investments," Journal of Portfolio Management. Brown, Gredil, Kaplan (2016) NBER w22493. Boyer, Nadauld, Vorkink, Weisbach (2016) NBER w22404. Couts (2024) SSRN. Jefferies 2024 Secondary Market Volume Review. Lazard 2025. Cliffwater research. Hamilton Lane 2025. MSCI Quarterly PE Index methodology. Solvency II Directive and Long-Term Equity Investment framework. Skadden Standard Formula series. PwC Financial Markets valuation benchmarking insights.
This note is market commentary intended for institutional and professional audiences. It is not investment, legal, accounting, or tax advice and should not be relied upon as the basis for any investment or operational decision. Forward-looking statements involve inherent risks and uncertainties. Actual outcomes may differ materially. Characterisations of named regulatory regimes and standards are observational and subject to revision as participants engage with the paper. © 2026 Arcanis. All rights reserved.
Citation: Prokofyev, A. (2026). The defendable price: How institutional valuation gets to the next bar. https://arcanis.com/research/defendable-price/
