Rising Scrutiny Forces PE/VC Funds to Rethink Valuations: From Cost to Calibration

There’s a noticeable shift happening in how private equity and venture capital funds are approaching valuations—and it’s not subtle anymore.

For a long time, many funds were comfortable leaning on cost or the last funding round as a reasonable estimate of fair value. In a rising market with frequent capital raises, that approach often held up. But in the current environment—where funding cycles are slower, terms are more complex, and valuations are under pressure—that logic is being questioned more directly.

And not just internally. Auditors and regulators are asking tougher questions.

The Pressure Is Real—and Increasing

Under ASC 820 and ASC 946, the requirement has always been clear: fair value should reflect an exit price from the perspective of a market participant.

But what’s changed is the level of scrutiny around how that principle is actually applied.

Audit teams—and increasingly the U.S. Securities and Exchange Commission—are no longer comfortable with passive approaches. Some of the questions coming up more frequently:

• Why is this investment still held at cost after multiple quarters?
• What has changed (or not changed) since the last round?
• Where is the evidence that the prior valuation still holds?
• How have market movements been reflected?

There’s a clear expectation now: valuation needs to move from assumption to analysis.

Cost Was a Starting Point—Not a Strategy

To be fair, using cost wasn’t inherently wrong. At the time of investment, it’s usually the best indicator of fair value. The issue is what happens after that.

In today’s environment, holding investments at cost without reassessment is increasingly difficult to defend—especially when:

• Markets have moved
• Company performance has shifted
• Or simply… time has passed

What auditors are pushing for is simple in concept, but harder in execution:
Show how value has evolved since day one.