The defensible mark: what a valuation rests on between exits

A fund that has sold a company has a price. Until then it has a valuation. Bain & Company's 2026 report counts roughly 32,000 unsold portfolio companies, carried at $3.8 trillion. For much of a fund's life, most of what it reports to its investors is an estimate.

The fund's manager makes that estimate. The manager also raises the next fund on the strength of it.

What the evidence says

Brown, Gredil and Kaplan studied reported fund returns in the Journal of Financial Economics in 2019. Their abstract states that some underperforming managers inflate reported returns during fundraising. It adds that those managers are less likely to raise a next fund, which suggests investors see through it. The same study finds that top-performing funds appear to understate their valuations.

The practical point is that a manager cannot settle the question by saying the valuation is fair. Because the next fund is raised on the number, the evidence behind it has to be stronger than it would be for a disinterested party.

The method is set out in the International Private Equity and Venture Capital Valuation Guidelines. A new edition was issued in December 2025 and applies to quarters beginning on or after 1 April 2026; the points below are the same in the edition before it. The guidelines require fair value at each measurement date. They state that the price of a recent investment is not a default that precludes re-estimating fair value. They also describe calibration: the assumptions used today should be tested against the assumptions that explained the price paid at entry.

Regulators have started to look at how well this is recorded. The United Kingdom's Financial Conduct Authority reviewed valuation practice in March 2025. Nearly all firms had governance in place. But in some cases committee minutes failed to record how valuation decisions were reached, and only a few firms showed strong awareness and control of all the conflicts involved. That is one market's regulator, and its findings are about that market.

Three inputs

For an established, profitable company the valuation has three inputs. Maintainable EBITDA is multiplied by a market multiple to give enterprise value. Net debt is subtracted to give equity value.

Here is the invented company used throughout this series, at 31 March 2026. The fund bought it three years earlier at seven times EBITDA, and values it today at the same multiple.

In this example the reviewer accepts the multiple. Two things change. The reviewer declines €0.6 million of costs that the company adds back as one-off. Of these, €0.4 million has no document behind it, and €0.2 million turns out to recur every year. And the reviewer counts €1.0 million of obligations as debt that the fund had left outside.

EBITDA moved by 10 percent and net debt by 7 percent. Enterprise value fell by 10 percent. Equity value fell by €5.2 million, almost a fifth.

In the fund's own terms: it paid €16.0 million. Its valuation shows 1.75 times that. The challenged figure shows 1.4 times.

The reason is leverage. Debt does not shrink when enterprise value does, so the whole fall lands on the equity. The more debt a company carries, the more a small change in earnings moves the mark.

The multiple matters as much. Half a turn less would take another €2.7 million. But the multiple is a judgement about the market: which companies are comparable, and what discount applies for size. It is the valuer's work. Our subject is the other two inputs, because they come from the company's own records.

The earnings file

The earnings file shows that EBITDA is maintainable. It holds twelve months of reported earnings that reconcile to the ledger. It holds every adjustment with its amount, its reason and its document. And it shows that the definition of EBITDA is the one used at entry, or lists what changed and when.

Calibration applies here too. This company was bought on reported EBITDA, with nothing added back. Today it is valued on EBITDA with €0.6 million added back. The multiple is the same, but the thing it multiplies has changed. A valuation calibrated to entry would either use reported EBITDA or explain, item by item, why the additions are justified now when none was needed then.

The debt file

The debt file shows that net debt is complete. It reconciles borrowings to bank confirmations. Then it lists every obligation that a buyer would raise in a negotiation, whether or not the loan agreement calls it debt.

In a Greek company that list has familiar entries.

Staff indemnity is the least visible. Greek law gives employees an indemnity on dismissal, and a share of it on retirement. Under Law 4308/2014, article 22, a company may measure the provision at the nominal amount the law gives at the balance sheet date, or by an actuarial method where that makes a significant difference. The official accounting guidance takes 40 percent of the dismissal amount as the base. A provision on that basis can be well below the figure an international buyer's actuary will produce. The difference is a debt-like item waiting to be found.

Instalment arrangements with the tax authority and the social security fund are a second entry. Cheques discounted with recourse and factoring with recourse are a third.

Not every one of these is deducted in full at a sale. Each is negotiated. But a fund that has not listed them has valued a company with less debt than a buyer will see.

What makes the earnings file hard

Twelve months of EBITDA is only as good as the months. The law requires the stock count at the balance sheet date. A company that keeps reliable perpetual stock records may count on a rolling basis. A company without them knows its stock once a year. Its gross margin for the other eleven months is an estimate.

The same applies to the holiday bonuses and to supplier invoices that arrive late. A valuation struck at the end of March, June or September uses months that were not closed to the standard of December. The December accounts were audited, and those months were not.

A layout: the valuation sheet

One page per company, each quarter. This is the sheet as it should be kept for the example company. It is not the sheet the fund in the example had.

The two bottom lines are the point of the sheet. A fund that keeps it sees the gap of €5.2 million every quarter, in its own handwriting, and can decide what to do about each row. The fund in the example sees it for the first time when a reviewer writes it down.

Four questions about a valuation

1. For each company, can the fund show on one page the EBITDA, the multiple and the net debt behind the latest valuation, each with its source?
2. Is the EBITDA in the valuation defined as it was at entry? If not, is the change written down and dated?
3. Does every adjustment have a document from the time it arose?
4. Does net debt include every item a buyer would raise: indemnity shortfall, State instalments, recourse financing?

A fund whose companies close each month and keep both files can produce the earnings and debt inputs without extra work. The multiple still needs a valuer.

Sources

• Bain & Company (2026). Global Private Equity Report 2026. Roughly 32,000 unsold companies representing $3.8 trillion.
• Brown, G.W., Gredil, O.R. & Kaplan, S.N. (2019). Do private equity funds manipulate reported returns? Journal of Financial Economics, 132(2), 267–297.
• International Private Equity and Venture Capital Valuation Guidelines, December 2025 edition, in effect for quarterly reporting periods beginning on or after 1 April 2026. Section I, 2.1, 2.3, 2.6 and 3.10.
• Financial Conduct Authority (5 March 2025). Private market valuation practices, multi-firm review, sections 2.1 and 2.2.
• Law 4308/2014, article 22 paragraph 13 (provisions for employee benefits) and article 4 paragraph 4 (stock count); Accounting Guidance on Law 4308/2014, paragraph 22.13.1.
• Law 2112/1920 and Law 4093/2012 (dismissal indemnity).