AIF Valuation and NAV – IPEV Guidelines | Independent Valuer | Deviation Triggers

AIF valuation is the process of establishing the fair value of a fund's portfolio investments and, from that, the Net Asset Value of its units. Category I and Category II AIFs must have their investments valued at least once every six months by an independent valuer, extendable to once a year with the approval of 75 percent of investors by value. Category III AIFs must keep NAV computation independent of the fund management function, disclosing it quarterly for close-ended schemes and monthly for open-ended ones. Where an asset's valuation moves by more than 20 percent between consecutive valuations, or more than 33 percent in a financial year, the Investment Manager must inform investors and explain why.

Table of Contents

1. Why Valuation Is the Hard Part
2. Three Approaches to Business Valuation
3. The IPEV Guidelines and the Seven Methods
4. Net Asset Value, Valuation Day and Classes of Units
5. The Valuation Regulations
6. Who Can Act as Independent Valuer
7. Deviation Triggers and Disclosure
8. Reporting NAV to the Depositories
9. Frequently Asked Questions

Check out NISM's Alternative Investment Fund Managers, the official NISM workbook for the Series XIX-C Certification Examination, published by Taxmann. The valuation chapter runs to 64 pages and carries fifteen worked illustrations, from asset-based and DCF valuation through relative multiples to a full Series NAV computation for a Category III AIF with differential unit classes.

1. Why Valuation Is the Hard Part

A listed portfolio prices itself. An AIF portfolio does not.

Category I and Category II AIFs invest primarily in unlisted companies and start-ups, where there is no market quote, often no comparable transaction, and sometimes no revenue. Yet investors receive periodic reports, performance is benchmarked, incentive fees are computed against NAV, and units are redeemed at a price. Every one of those depends on a number somebody has estimated.

That estimate is the weakest link in fund reporting. RVPI, TVPI and any NAV-linked fee all inherit whatever assumptions went into the valuation. This is why SEBI has progressively tightened who may value, how often, and what must be disclosed when the number moves sharply.

2. Three Approaches to Business Valuation

Several approaches exist. Three are used in practice.

The income or earnings approach uses expected future earnings to measure free cash flow and derive value, typically through discounted cash flow. It has the strongest theoretical foundation because it values the business on what it will actually generate.

The relative or market approach values the business against earnings multiples of comparable companies or recent transactions.

The asset-based or cost approach values the business on its net assets.

The income approach generally scores over the other two, because the cost approach ignores several critical drivers of value. But it carries its own problem: it depends on judgemental assumptions about discount rates and cash flows, which makes it subjective in exactly the situations where certainty is most wanted.

Relative valuation has a different weakness. It requires genuinely comparable data. Where a business model is unique, or where no comparable exists, the result can mislead rather than inform. Comparing an apple to something that is not an apple produces a number, and the number looks the same as a reliable one.

3. The IPEV Guidelines and the Seven Methods

AIF managers must carry out periodic valuations of portfolio investments as part of reporting to investors. The International Private Equity and Venture Capital Valuation Guidelines, issued by the IPEV Board, set out what the industry treats as current best practice for valuing unlisted equity.¹

Their purpose is uniformity: high-quality, globally acceptable, principles-based guidance for private equity and venture capital, so that valuation practice is consistent irrespective of the size or composition of the portfolio. The central proposition is that fair value is the best measure, both of portfolio companies from the Manager’s perspective and of the fund from the investor’s. Fair value is the arm’s length price between a willing buyer and seller who are not connected, which under Ind AS 113 is the price receivable on selling an asset in an orderly transaction between market participants at the measurement date.

The IPEV Board has an understanding with the International Valuation Standards Council aimed at keeping the Guidelines consistent with International Valuation Standards.

Seven methods are identified as the most widely used.

Method	When it applies
Price of previous transaction	Where the AIF makes a follow-on investment, the pricing of that round becomes the implied market value applicable to the whole holding. A first investment is carried at cost and revised on subsequent rounds
Early stage companies	Seed, start-up and early-stage investments valued through a milestone approach or scenario analysis, since cash flow forecasts are unreliable. The Option Pricing Method is also used, allocating current equity value across classes of equity over a continuous distribution of outcomes
Multiples approach	For profit-making companies. Comparable ratios from quoted markets or recent transactions, with an illiquidity discount applied to reflect that the stock is unlisted. The discount may narrow where the Manager believes an exit is imminent
Net asset valuation	Where the investee is loss-making or is itself in the business of finance and investments, valued by reference to net tangible assets
Discounted cash flow	Recommended for its theoretical strength, but highly sensitive to discount rate and cash flow assumptions. To be used only where enough data exists to make realistic assumptions
Valuation of debt investments	DCF of future cash flows, extending to subordinated debt, mezzanine and preference shares with predictable cash flows. Non-performing collateralised debt is valued on the collateral, the risk of realising it and the time to do so. Uncollateralised or restructuring debt is valued on most likely cash flows discounted at a market purchaser’s cost of capital
Industry metrics	Non-financial metrics used in sectors such as e-commerce, telecom and hospitality, including multiples of sales and value per subscriber. The further a metric moves from future cash generation, the more likely it is to prove inaccurate

4. Net Asset Value, Valuation Day and Classes of Units

Every Category III AIF must ensure that NAV calculation is independent of its fund management function. That separation is the point: the people who choose the investments should not be the people who price them.

4.1 Valuation Day

The Valuation Day is fixed in advance by the fund and communicated to investors in the offer documents. It is the reference date by which NAV is determined, and it can be set in more than one way:

• At least once a calendar month for open-ended Category III AIFs, or at least once a quarter for close-ended ones, as on the last business day of that month or quarter. Where the fund invests only in listed securities, NAV is usually computed daily
• At the close of business of the last securities market on every business day on which the fund deals or executes trades, for mark-to-market purposes
• At intervals the Investment Manager determines for a closing, a redemption or a distribution. Each such day is a Valuation Day

4.2 Classes of units

Units determine each investor’s beneficial interest in the fund, and that interest is the basis on which allocations and distributions are made on liquidation or redemption.

A Category III AIF may assign differential rights to a class of investors based on the size of their commitments, when those commitments were made, and their proportion of the total corpus. To identify those investors, the Manager issues different classes of units. Institutional investors, the Sponsor, employees of the Investment Manager and other investors may each hold a separate class.

Classification is at the Manager’s discretion, and the consequence is that a single fund can carry several NAVs. Each class, and each series within a class, is computed separately, which is why the workbook devotes a full section to reconciling fund-level NAV against Series NAV.

5. The Valuation Regulations

Regulation 23 of the SEBI (AIF) Regulations requires all AIFs to value their investments in the manner SEBI specifies, and to give investors a description of the valuation procedure and the methodology used.²

Which norms apply depends on the security.

• Securities other than unlisted securities and non-traded or thinly traded listed securities, where norms exist under the SEBI (Mutual Funds) Regulations, are valued under those Regulations
• Securities with no norm prescribed under the Mutual Funds Regulations are valued under guidelines endorsed by an AIF industry association representing at least 33 percent of SEBI-registered AIFs by membership. That association endorses guidelines after taking into account the recommendations of SEBI’s Alternative Investment Policy Advisory Committee

The PPM must contain the valuation methodology and approach adopted for each asset class of the scheme.

5.1 Frequency

Category I and Category II AIFs must value their investments at least once every six months, through an independent valuer appointed by the AIF. That period may be extended to one year with the approval of at least 75 percent of investors by value of their investment in the fund.

Category III AIFs disclose NAV quarterly where the fund is close-ended and monthly where it is open-ended, and must have their unlisted securities and listed debt securities valued by an independent valuer.

5.2 A change in methodology is not automatically a material change

Changing the methodology or approach within the prescribed valuation guidelines is not, by itself, a material change. But valuations under both the old and the new methodology must be disclosed to investors, so that the effect of the change is visible rather than buried.

6. Who Can Act as Independent Valuer

The Investment Manager appoints the independent valuer, and eligibility is prescribed rather than left to judgement. The valuer must:

• Not be an associate of the Manager, Sponsor or trustee of the AIF
• Have at least three years of experience in the valuation of unlisted securities
• Satisfy one of the following: be registered with the Insolvency and Bankruptcy Board of India and hold membership of ICAI, ICSI, ICMAI or the CFA Institute; or be a holding company or subsidiary of a SEBI-registered credit rating agency; or meet such other criteria as SEBI may specify

Where the valuer is a partnership entity or a company, it must be a Registered Valuer Entity registered with IBBI, and the person deputed to value the AIF’s portfolio must hold membership of ICAI, ICSI or ICMAI, or a CFA charter.³

Appointing a valuer does not transfer the obligation. The Investment Manager remains responsible for a true and fair valuation of the fund’s investments.

7. Deviation Triggers and Disclosure

Where the fund’s own valuation policies and procedures do not produce a fair and appropriate valuation, the Investment Manager must depart from them, value the asset at fair value, and document the rationale for departing.

Two numerical triggers require investors to be told.

Trigger	What must follow
Deviation of more than 20 percent between two consecutive valuations of an asset	Inform investors with reasons, covering both generic and specific factors including changes in accounting practices or policies, assumptions, projections, and valuation methodology or approach
Deviation of more than 33 percent in an asset’s valuation within a financial year	Same disclosure obligation

Separately, any change in valuation methodology or approach is treated as a material change significantly influencing an investor’s decision to stay invested, which brings the disclosure and reporting requirements for material changes into play.

Three things must be disclosed as part of the PPM changes submitted annually to SEBI and to investors: changes in valuation methodology and approach for each asset class; changes in the accounting practices or policies of the investee company and the scheme; and the effect of those changes on the valuation of the scheme’s investments.

8. Reporting NAV to the Depositories

All AIF schemes must issue units in dematerialised form, and each unit issued in demat form carries an International Securities Identification Number. AIFs, through their Registrars and Transfer Agents, upload the latest NAV against each ISIN.

The depositories are required to carry a disclaimer wherever an AIF NAV is displayed, recording that the NAV shown is based on the valuation methodology and accounting practice followed by that particular AIF, and referring the investor to the fund documents.

The disclaimer exists for a reason worth noting. Two AIFs can display NAVs that look directly comparable and are not, because the valuation policies underneath them differ. For the underlying circulars and the current text of the AIF Regulations, see Taxmann.com | Research. Step-by-step compliance procedure for AIF valuation and reporting obligations is maintained at Taxmann.com | Practice. Funds with a specific valuation, disclosure or valuer-appointment question can take it to Taxmann Advisory.

9. Frequently Asked Questions

9.1 How often must an AIF value its investments?

Category I and Category II AIFs at least once every six months through an independent valuer, extendable to once a year with approval of at least 75 percent of investors by value. Category III AIFs disclose NAV quarterly if close-ended and monthly if open-ended.

9.2 Who can be an independent valuer for an AIF?

Someone who is not an associate of the Manager, Sponsor or trustee, has at least three years of experience valuing unlisted securities, and is either an IBBI-registered valuer holding ICAI, ICSI, ICMAI or CFA Institute membership, or a holding company or subsidiary of a SEBI-registered credit rating agency.

9.3 What are the IPEV Guidelines?

The International Private Equity and Venture Capital Valuation Guidelines, issued by the IPEV Board, setting out current best practice for valuing unlisted equity investments on a fair value basis. They identify seven widely used valuation methods.

9.4 When must an AIF inform investors about a valuation change?

Where an asset’s valuation deviates by more than 20 percent between two consecutive valuations, or by more than 33 percent within a financial year. Any change in valuation methodology or approach is separately treated as a material change.

9.5 How is NAV calculated for a Category III AIF?

By dividing the value of assets attributable to a class or sub-class of units, reduced by the liabilities, contingencies, losses and expenses attributable to that class, by the total number of units issued. It is computed separately for each class and each series of units, and rounded to four decimal places.

9.6 Is NAV calculation independent of the fund manager?

It must be. The AIF Regulations require every Category III AIF to ensure that NAV calculation is independent of its fund management function.

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1. International Private Equity and Venture Capital Valuation Guidelines, issued by the IPEV Valuation Guidelines Board.
2. Regulation 23, SEBI (Alternative Investment Funds) Regulations, 2012, as amended by the SEBI (AIF) (Second Amendment) Regulations, 2023 with effect from 1 November 2023.
3. SEBI Circular No. SEBI/HO/AFD/PoD-1/P/CIR/2024/123 dated 19 September 2024, Modification in framework for valuation of investment portfolio of AIFs.