There is no stock ticker for a Series B stake in a private company, so a fund manager holding one still has to put a number on it every time investor reports go out. Fair value for private company investments is an estimate of the price the SPV would receive if it sold the position in an orderly transaction between market participants, not the price the sponsor hopes the company is worth.
Under generally accepted accounting principles, that estimate follows a specific framework known as ASC 820, which applies whenever an SPV’s financial statements need to reflect current value rather than original cost, most often because an independent audit is involved. Most single-asset SPVs mark a position at cost until something changes it, then update the mark when a new financing round, an acquisition offer, or a material business change gives a reason to.
This guide covers how fair value works for an illiquid private holding, the three general approaches to estimating it, why the company’s last financing round is usually the anchor, and how a mark moves up or down between rounds.
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What fair value means for an illiquid private holding
Fair value is an exit price: what a willing buyer would pay a willing seller for the exact security the SPV holds, assuming neither side is under pressure to transact. That is a different question from what the company’s founders think the business is worth, or what the last funding round’s headline valuation implies for every class of stock. A convertible note, a SAFE, and common stock in the same company can carry different fair values on the same day, because each one carries different rights and a different position in the company’s capital structure.
The three approaches to valuing a private company investment
Valuation professionals generally reach for one of three approaches, sometimes blending more than one:
- Market approach: anchor to an observable transaction, most often the company’s own most recent financing round, or occasionally a comparison to similar public companies.
- Income approach: discount the company’s projected future cash flows back to a present value, which works best for a business with a real revenue and earnings history.
- Asset approach: add up the fair value of the company’s net assets, which fits a holding company or an asset-heavy business more than an early-stage operating company.
For most SPVs holding early-stage equity, the market approach built around the last financing round does most of the work, with the other two approaches used to sanity-check the result or to value a company that has stopped raising money. For more on how these approaches get applied in practice, see The Definitive Guide to Venture Capital Valuation Methods.
Why the last financing round is the usual starting point
A recent, arm’s length equity round is the strongest available evidence of a private company’s value, because it reflects a negotiated price between the company and sophisticated investors putting in real capital. An SPV that invested in that same round can generally mark its position at the round’s price on the day it closes. The harder question comes later, once time passes and the company’s situation changes without a new round to reset the number. A priced round is not the only trigger worth watching either; see What Is a 409A Valuation? for how a separate, tax-driven valuation of the common stock can also move independently of the preferred price.
Adjusting the mark between financing rounds
Between rounds, a fund manager looks for evidence that the company’s value has moved: a term sheet for a new round at a different price, a major customer win or loss, a leadership change, or a broad shift in how public markets price comparable companies. None of these carries the same weight as an actual closed round, so marks based on them tend to be more conservative and better documented, often with a shorter narrative explaining the basis for the change.
The fair value hierarchy
| Level | What it means | Typical for a private SPV holding |
|---|---|---|
| Level 1 | Quoted price in an active market for the identical asset | Almost never, since the holding is not publicly traded |
| Level 2 | Observable inputs other than a quoted price, such as a very recent comparable transaction | Sometimes, shortly after a new financing round closes |
| Level 3 | Unobservable inputs that rely on the preparer’s own assumptions | Most common, since private company valuations rely heavily on judgment |
Level 3 is not a warning sign by itself. It is simply where nearly all illiquid, privately held positions land, and it is why the notes to an SPV’s financial statements typically describe the valuation method and key assumptions in more detail than a Level 1 holding would ever need.
A worked example: marking a position after a down round
For example, suppose an SPV bought preferred stock in a company’s Series B round at $8.00 per share. Eighteen months later, the company raises a Series C at $5.00 per share to extend its runway. Series C investors also receive a liquidation preference ahead of the Series B shares the SPV holds, which reduces what the SPV’s shares would fetch in most exit scenarios even before accounting for the lower headline price. A reasonable fair value exercise marks the SPV’s position down from its $8.00 cost basis, using the Series C price as the anchor and then adjusting for the fact that the SPV’s shares sit behind the new round in the payout order.
Who performs the valuation and how often
For a small, single-asset SPV, the sponsor typically prepares the valuation itself, informed by whatever new financing or business information is available, and its accountant reviews the result as part of preparing annual financial statements. A larger fund, or one that faces the SEC’s custody rule and needs audited financial statements, more often uses a written valuation policy applied consistently across its whole portfolio and reviewed by its accountant or an outside valuation firm. Quarterly marks are common in institutional reporting, but a single-asset SPV with no new information since the last update can reasonably carry the same mark forward rather than manufacturing a change.
Frequently asked questions
How is a private company’s fair value determined?
Usually by anchoring to the company’s most recent financing round and adjusting for anything material that has changed since, such as a new round at a different price, a change in the security’s rights, or a shift in the company’s prospects. Income and asset-based approaches supplement the market approach for companies where a recent round is not available.
What is ASC 820?
ASC 820 is the accounting standard that defines fair value and sets out the framework for measuring it under generally accepted accounting principles, including the three-level hierarchy used to describe how much judgment went into a given estimate.
Does a private investment need a new valuation every quarter?
Not necessarily. A fund preparing quarterly investor reports typically refreshes its marks each quarter, but a holding with no new financing, business, or market information since the last update can often carry the prior mark forward with a brief note explaining why.
What happens to fair value after a down round?
The position is typically marked down to reflect the lower price and any change in the security’s payout priority relative to the new round, rather than being held at the original cost basis once a new arm’s length price is available.
Reporting fair value on Syndicately
Syndicately supports the investor updates and capital account statements that carry an SPV’s valuation marks to its limited partners, alongside distributions and Form 1065 and K-1 preparation with a third-party provider. The sponsor and its accountant remain responsible for the valuation methodology itself; Syndicately does not perform valuations or give tax or investment advice. Learn more about SPV reporting on Syndicately.
This article is general information, not legal, tax, or investment advice. Valuation judgments depend on the facts of each holding, so work with a qualified accountant or valuation professional. Source: SEC Division of Investment Management, valuation of portfolio securities.
