NAV-igating the Shift in Private Markets: How Daily Numbers Are Steering Smarter Portfolios
Valuation practices have long adhered to a traditional cadence: monthly, quarterly, or even annual net asset value (NAV) calculations. This system, once deemed sufficient, is getting put to the test by today’s fast-moving environment. As more firms embrace the concept of calculating daily NAVs, the shift underscores the change firms are up against when it comes to how they operate business, manage assets, and communicate with investors.
Though not universally adopted, the trend toward daily NAV calculation is growing, driven by several compelling factors.
Historically, firms investing in the private markets produced the NAV less frequently. Monthly or quarterly calculations worked in an environment where investments were typically illiquid and investors weren’t accustomed to receiving frequent updates on their assets. In recent years, a confluence of factors has emerged that makes the daily NAV calculation not only desirable but increasingly necessary.
Key drivers behind the trend
Perhaps one of the most significant reasons behind the move to daily NAV calculations is the growth of semi-liquid funds. The fund structure enables greater liquidity for investors but also requires increased portfolio and asset valuation transparency — particularly for investments in private equity, real estate, infrastructure, and private credit that are often illiquid.
Assets can dramatically fluctuate in value based on a market’s ups and downs. The overall value of a portfolio can swing significantly as the price of an underlying security shifts in response to economic data, geopolitical events, or changes in investor sentiment.
Take recent economic volatility as an example. Economic downturn may cause stock prices to tumble. When asset values fall, the NAV follows suit, reflecting the dip in the fund’s overall worth. Same idea when assets see a price increase. Daily valuations give investors a more up-to-date picture of a fund's true value whereas traditional monthly or quarterly calculations don’t provide investors with a complete, real-time view.
Let’s dig deeper into the leading factors behind the push for a daily NAV:
- Private markets growth fuels valuation frequency needs
- Retailization of alternative investments creates demand for more accurate and timely pricing
- The launch of new fund structures mandates more frequent valuations
- Regulatory pressure generates more transparent practices
Private markets growth
Private markets continue to outperform their public counterparts, with AUM growing at a steady pace. The demand for more up-to-date valuation grows as private markets become a larger segment of the global financial system. This trend is pushing private market firms to evaluate how daily NAV calculations reflect the dynamic nature of these assets and ensure that investors are not left with stale data that does not accurately reflect the current value of their investments.
Retailization of alternative investments
One of the most significant catalysts behind the push for daily NAVs is the growing retailization of alternative investments. As retail investors gain easier access to alternative asset classes, the call for more frequent, transparent valuations is growing louder. Previously reserved for institutional investors, alternatives are becoming available to a broader pool of retail investors, often through lower barriers to entry.
Currently, individual investors hold about half of the world’s assets under management — $295 trillion — a staggering opportunity if managers can capture even a small percentage.
Retail investors, accustomed to the daily pricing and transparency offered by public markets, expect the same from their private market investments. The shift toward daily NAV calculations allows firms to provide more timely and accurate updates, accelerating demand and improving investor confidence.
READ OUR EBOOK: The Retailization of the Private Markets
New fund structures
The surge in new fund structures — specifically interval funds, tender offer funds, and evergreen funds — is also driving the need for more frequent NAV calculations. New investment vehicles provide investors with more flexibility and liquidity options compared to traditional closed-end funds, but they also require greater transparency.
- Interval funds: These investment vehicles allow investors to purchase shares at any time but only redeem them at fixed intervals (e.g., every 3, 6, or 12 months). With this model, investors expect accurate and timely valuations to ensure they are making informed decisions at each repurchase opportunity.
- Tender offer funds: Like interval funds, tender offer funds offer continuous share offerings and provide liquidity through periodic repurchases. Tender offer funds, however, conduct repurchases at their discretion, which increases the need for up-to-date valuations to ensure updated pricing when investors decide to tender shares.
- Evergreen funds: Open-ended funds, also known as evergreen funds, allow investors to redeem their units at any time, as opposed to the fixed lifespan of traditional closed-end funds. Because of their complex structure, more frequent NAV updates can enable managers to provide more accurate pricing and valuations to promote investor confidence.
Regulatory pressure
The push for more frequent NAV calculations is not only market-driven but also regulatory. Recent evaluations, such as the UK’s Financial Conduct Authority (FCA) review in March 2024 and SEC Rule 2a-5, have emphasized the importance of robust, transparent valuation practices for private market investments. With regulators increasingly identifying valuation as a ‘significant risk,’ firms are under pressure to ensure fair treatment of investors and maintain market integrity.
The impact on investment firms
Shifting to a daily NAV comes with its share of challenges. You’ll want to make sure you are prepared to streamline valuation processes, fine-tune data integration and normalization, and quickly manage discrepancies to meet daily reporting requirements. By preparing to adjust operations, technology, and processes, you position your firm to ensure accuracy, consistency, regulatory compliance, and trust with your investors.
Several key considerations will shape your transition:
1. Robust valuation processes
One of the most significant changes will be establishing more comprehensive, transparent valuation processes. And it won’t be simply calculating NAVs more frequently; the focus must be on ensuring your valuation process is robust, well-documented, and can adapt to market conditions. By ensuring your investors understand how valuations are determined — particularly during periods of volatility or market disruption — you help them make decisions faster and position your own firm as their investment partner.
2. Improved transparency and communication
As daily NAVs become more common, investors will likely begin to request more frequent and detailed reporting. Increased transparency means more sophisticated reporting technology that’s capable of delivering timely and accurate quantitative and qualitative data. You’ll also want to ensure communication with your investors is clear and effective, particularly when explaining the intricacies of daily NAV calculations or responding to investor concerns.
3. Third-party valuation advisors
Given the complexity of daily NAV calculations, particularly for illiquid assets, third-party valuation advisors can offer additional insight and guidance, ensuring that valuations are accurate and free from conflicts of interest. Be sure to thoughtfully monitor advisors so that their involvement does not create new risks or undermine the integrity of the valuation process.
4. Technology and systems readiness
Perhaps the most significant operational change is the need for technology systems that can support daily NAV calculations. Traditional systems and processes designed for monthly or quarterly valuations may not be up to the task of daily NAVs. But what does “good” look like operationally? Technology that is nimble, auditable, and capable of integrating data from a variety of sources will help ensure your firm is ready to keep up with the demands of daily valuations. Automation will also play a key role in ensuring managers can handle increased data aggregation, reconciliation, and reporting required to meet the demands of daily NAVs.
CASE STUDY: A Powerful NAV Oversight Solution for Private Markets
The road ahead
As the financial investment industry continues to evolve, the trend toward daily NAV calculations in private markets seems set to stay. Retail investors, new fund structures, regulatory pressures, and the desire for more updated valuation of illiquid assets are all driving this change. For private market managers, this shift represents a significant operational challenge, but also an opportunity to enhance transparency, improve investor confidence, and stay ahead of industry trends.
By investing in the right technology, processes, and expertise, firms can position themselves to thrive in this new era of daily NAV calculations, ensuring they meet the demands of investors while maintaining the integrity and efficiency of their operations. The future of private markets may be more frequent valuations, but with the right strategy, firms can turn this challenge into a competitive advantage.
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