Why Unlisted Valuation Is the Hardest Part of AIF Accounting
Unlike a mutual fund holding listed shares with a daily market price, most Category I and II AIFs hold unlisted securities — start-up equity, CCDs, CCPS, or private debt — with no observable market price. Valuing these holdings accurately, and defensibly, directly determines the fund's reported NAV and, ultimately, what investors believe their capital is worth.
Who Values the Holdings
SEBI requires AIFs to have their unlisted investments valued by an independent valuer, engaged per the fund's PPM and applicable SEBI valuation norms, at a frequency the PPM specifies (commonly annually at minimum, with more frequent valuation for larger or more actively traded portfolios).
Common Valuation Methodologies
- Market approach — comparable company or comparable transaction multiples, where sufficiently similar reference points exist
- Income approach — discounted cash flow (DCF), particularly for more mature, cash-generating portfolio companies
- Cost/recent transaction approach — using the price of a recent priced round as a valuation anchor, common for early-stage venture positions with limited operating history
- Net asset value approach — for holding-company or asset-heavy structures Industry practice in India generally follows internationally recognised private equity/venture capital valuation guidelines, applied consistently period-over-period.
Why Consistency Matters More Than Precision
Because unlisted valuation inherently involves judgment, the more important discipline is methodological consistency — using the same approach and assumptions period to period unless there's a documented reason to change, so that NAV movements reflect real changes in portfolio value rather than valuation-methodology noise.
How Valuation Feeds Into NAV, Fees, and Reporting
Portfolio valuation isn't an isolated exercise — it flows directly into the fund's NAV computation (see our related article), which in turn affects management fee calculations (where fee is charged on NAV or invested capital), investor capital account statements, and SEBI regulatory reporting.
Documentation That Should Exist for Every Valuation
- The valuer's engagement letter and independence confirmation
- The valuation methodology and key assumptions used
- Board/investment committee sign-off, where the PPM requires it
- A clear reconciliation from valuation output to the fund's books
How We Support Fund Valuation Processes
We coordinate with independent valuers, review valuation methodology for consistency with the PPM, and reconcile valuation outputs into the fund's financial statements and NAV workings as part of our fund accounting and audit engagements.
This article is for general informational purposes and does not constitute valuation advice. Please engage a qualified independent valuer for your fund's specific portfolio.