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FRM Part II · FRM Exam Part II · Private Markets Investing

A pension fund is evaluating a commitment to a private equity fund. Its investment committee asks which feature of private fund reporting most directly limits the reliability of reported interim net asset values (NAVs) compared with listed equity prices. Which is the best answer?

Interim private fund NAVs are mostly manager-estimated fair values built from models and comparables, not observable market prices. This subjectivity can smooth returns and understate risk, which is why investors scrutinize valuation policies and independent oversight.

  1. ANAVs are typically based on manager-determined fair value estimates rather than observable market transactionsCorrect
  2. BNAVs are always reported daily, which creates excessive noise
  3. CNAVs are audited only once every five years
  4. DNAVs exclude all management fees and carried interest accruals by regulation

Explanation

Private fund holdings rarely trade, so interim NAVs rely on valuation models, comparables and manager judgment. This creates subjectivity and potential smoothing. The other options misstate typical practice: reporting is usually quarterly, audits are annual, and fees are generally accrued.

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