Demystifying Private Equity Valuations: What Every Investor Should Know

Private equity is viewed as a long-term asset class, where patient capital is invested in businesses with the aim of building lasting value. But while investors wait for those investments to mature and exit, how do they know what they’re worth during the hold period?

In public markets, the answer is simple: investors collectively determine the price of a business (at least a minority interest in the firm) every minute of a trading day.

In private markets, valuations are more readily determined when businesses are bought and sold, or when new equity is raised to grow the business. However, determining interim valuations is more nuanced than in public markets. Although valuations are primarily determined using established methodologies, there is also a need for subjective judgment. This makes valuations less precise, and specialized valuation firms are typically critical in determining interim value.

Why Valuation Matters in Private Equity

Valuation is more than a quarterly accounting exercise. It is the backbone of portfolio reporting, performance measurement, and ultimately, investment decisions. It influences several critical metrics such as:

• NAV (Net Asset Value) reporting – the official fair value estimate of the investment for reporting purposes.
• Performance metrics – such as IRR (Internal Rate of Return) and multiple on invested capital.
• Portfolio construction decisions – from capital allocation to exit timing.

Given private equity investments are illiquid and infrequently transacted, interim valuations serve as the best available estimate of “what it’s worth today.”

The Nicola Approach to Valuation

Core to Nicola Wealth’s private equity strategy is a partnership-centric approach to direct investing: working with top-tier, long-tenured private equity sponsors, gaining access to high-quality opportunities, and selecting the best investments from our opportunity set.

Our private equity valuations begin with these partners – General Partners (“GPs”) – providing fair value marks based on the underlying companies’ quarterly financial statements, which are audited annually and typically supported by third-party valuation reviews. Nicola Wealth then applies additional oversight.

Our Venture Capital and Infrastructure LPs follow a similar process. This approach of relying on GP-provided marks combined with internal oversight is standard practice among many institutional private equity investors. Here’s how it works:

1. Quarterly Cadence: Financial reporting – including revenues, earnings, and key balance sheet items such as cash and debt – along with valuations are updated in line with GP quarterly reporting cycles, and reviewed more frequently if a material event occurs between reports.
2. Independent Review: GP valuations typically undergo several layers of review, including the GP’s independent Valuation Committee (comprising senior firm leaders) and external auditors/advisors, to assess inputs, methodology, and reasonableness. After we receive the GP valuation, Nicola Wealth’s investment team provides additional oversight by tracking business fundamentals and monitoring peer valuations quarterly. This allows us to identify disconnects and engage with our partners when needed.
3. Diversification as a Safeguard: With more than 30 GPs in our private equity (PE) portfolio and hundreds of underlying portfolio companies, no single GP or co-investment represents a significant portion of our LP or Fund. By design, the impact of any one valuation is therefore limited.

Inside the Valuation Toolbox and Conservatism

GPs are typically on the front lines of valuation, applying structured and repeatable frameworks. Common valuation methods include:

• Public Market Comparables: Benchmarking against the valuation of publicly traded peers, adjusting for size, sector, and growth rate.
• Precedent Transactions: Comparing the portfolio company to valuation multiples from similar businesses that recently sold.
• Discounted Cash Flow (DCF): Forecasting future cash flows and discounting them to present value.

Weightings vary by company maturity. Early-stage VC and growth assets may rely more on last financing round values, while mature PE buyout and infrastructure investments rely more evenly on the three approaches above.

It’s important to note that in private equity, GP performance fees are ultimately based on realized gains, not interim marks. As a result, valuations tend to err on the side of conservatism. New investments are often carried at purchase price for several quarters before being revalued. After that, valuations shift up or down based on business fundamentals rather than day-to-day market sentiment.

In our experience, sale prices of private equity businesses often come in 30–40% higher on exit than reported valuations four quarters prior. Nicola Private Equity Limited Partnership (NPELP) has also seen this trend in our recent exits.

¹Includes four exits in 2024 and 2025. NAV figures shown are for the entire investment, not just NPELP’s pro-rata share.

This conservatism serves a purpose. It reduces reputational risk from marking assets too high only to sell them for less. It also makes PE valuations less volatile compared to public markets. NAV changes in private equity tend to be measured and infrequent, even during sentiment-driven market swings.

What This Means for Investors

Private equity valuation is about building a fair, defensible picture of value that can guide decision-making, protect investor confidence, and withstand scrutiny at the point of exit.

By combining GP-led valuation processes with independent review and portfolio diversification, Nicola Wealth’s private equity platform aims to deliver valuations that reflect both current conditions and long-term fundamentals.

Learn more about how private equity fits into a diversified investment strategy: https://nicolawealth.com/private-capital/strategies/private-equity