The Problem With Valuing Illiquid Assets

Why valuation matters even before you sell

The obvious answer to "how much is my private investment worth?" is: "I'll find out when I sell it." But this approach has real costs:

• You can't calculate meaningful returns without interim valuations. IRR requires a current value. If your PE stake is permanently marked at cost, your "return" will always be zero until the moment it's not.
• Asset allocation becomes guesswork. Without realistic valuations, a portfolio tracker showing private assets at cost is misrepresenting your actual position.
• Net worth figures are unreliable for financial planning decisions — mortgage applications, retirement projections, further investment decisions.

Private equity and venture capital

For direct stakes in private companies, the most defensible valuation approach is to mark to the last funding round. For LP interests in VC or PE funds, the fund publishes a NAV periodically — that's your valuation.

The caveat: funding round valuations can lag reality significantly. A company last valued at £50m in 2021 might be worth considerably less today given changes in comparable company multiples. Sophisticated investors apply a qualitative haircut; most individuals just use the last round.

Real estate

Direct property ownership involves the widest range of valuation methods — from a formal RICS appraisal to noting what the house down the street sold for. For portfolio tracking purposes, what matters is that you update periodically and document the basis.

Mortgages complicate this: the gross value of the property and the net equity position are both important figures, and a system that only shows one of them is incomplete.

Collectibles and alternatives

Physical assets — art, wine, watches, coins — are valued based on comparable auction or dealer sales. These valuations can be highly uncertain. The tracking requirement is to record the purchase price, current best estimate, and the basis for that estimate.

The minimum viable valuation framework

1. Separate cost from value. Every asset has a cost basis and a current value. These should always be tracked independently — conflating them is the source of most tracking errors for illiquid assets.
2. Record the basis for each valuation. "Last round price" is different from "my estimate" is different from "formal appraisal". The basis affects how much weight to put on the figure.
3. Update on trigger events, not on a fixed schedule. A new funding round, a nearby comparable sale, a fund NAV statement — these are your update triggers.
4. Track the history. Valuation changes over time tell you whether your early estimates were reasonable and how the asset has performed against expectations.

The goal isn't perfect precision — private asset valuation never achieves that. It's to make the uncertainty legible, so you can make better decisions with it.