Financial Reporting
When a Continuation Fund Prices Below Your Carrying NAV, the Mark Moves First
A continuation vehicle priced at 88% of your last NAV is ASC 820 evidence, not a deal quirk. What fund CFOs must adjust, document and defend at quarter-end.
By 409.AI Team - 2026-10-01
# When a Continuation Fund Prices Below Your Carrying NAV, the Mark Moves First
A continuation vehicle closes at 88% of the NAV you reported last quarter. The lead investor ran real diligence, the LPAC signed its conflicts waiver, and a fairness opinion sits in the file. Then your audit senior asks the question you hoped to defer: if a buyer just paid 88, why does the asset still sit at 100 in the legacy fund's books?
That question has a right answer under ASC 820, and it isn't "secondaries price at a discount." Fund CFOs and controllers who treat the price as a deal outcome rather than a valuation input tend to lose this argument at year-end, and they lose it in the worst way: as an audit adjustment, after the LP report has gone out.
These vehicles aren't niche anymore. CFA Institute's [September 2025 report on continuation funds](https://rpc.cfainstitute.org/research/reports/2025/continuation-funds), by Stephen Deane and Ken Robinson, puts global volume at roughly USD 63 billion in 2024, nearly triple five years earlier, against an exit overhang of some 29,000 unsold portfolio companies worth an estimated USD 3.6 trillion. If you run a 2017 or 2018 vintage, a continuation vehicle is now one of the few realistic routes to a distribution.
The manager sits on both sides, and ASC 820 doesn't care
Under ASC 820, fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Two words do the work: *orderly*, and *market participants*.
A continuation fund hands you something rare in private markets: an observable, negotiated price for the exact position you're carrying, which beats a comparable-company multiple. It's also a transaction where, as the CFA Institute report puts it, the manager "sits on both sides of the continuation fund transaction and owes fiduciary duties to both buyers and sellers."
So the price is at once your most relevant input and the one carrying the most obvious conflict. The [2025 IPEV Valuation Guidelines](https://www.privateequityvaluation.com/Portals/0/Documents/Guidelines/2025%20IPEV%20Valuation%20Guidelines.pdf), which European and UK funds apply and US funds often reference alongside the AICPA guidance, handle that tension under insider funding rounds. Where a round involves only existing investors in the same proportions, IPEV says "the commercial need for the transaction to be undertaken at Fair Value may be diminished." Then comes the sentence that decides most continuation fund cases:
> Nevertheless, a financing with existing investors that is priced at a valuation that is lower than the valuation reported at the previous reporting date (insider down round) may indicate a decrease in value and should therefore be taken into consideration.
Read that asymmetry carefully, because it's the whole point. A conflicted transaction gets limited weight when it would push your mark *up*. One priced *below* your last reported value is evidence of a decline, and you have to deal with it. The conflict doesn't cut both ways.
A continuation vehicle isn't a textbook insider round, since a third-party lead sets the price and new capital arrives. That strengthens the case for the price: the conflict lives in the manager's incentives, not in the absence of a real counterparty.
When you can discount the price, and when you can't
ASC 820 gives you a defined test rather than a judgment call. ASC 820-10-35-54I lists the circumstances indicating a transaction is *not* orderly: inadequate market exposure before the measurement date, marketing to a single buyer, a seller in or near bankruptcy, a sale forced by legal or regulatory requirement, and a price that is an outlier against other recent deals.
Walk a typical process against that list and almost nothing hits. The CFA Institute report describes a two-stage auction run by the GP's agent, with multiple finalists bidding blind on price before a lead is selected: adequate market exposure, multiple bidders. The legacy fund isn't distressed and isn't being forced to sell. On the fifth indicator you'd have to show the price is an outlier, which is hard when, per Lazard data cited in the same report, 56% of single-asset continuation vehicles priced at or above NAV in 2024 and most multi-asset vehicles priced between 80% and 100% of NAV. Your 88 isn't an outlier. It's the middle of the distribution.
ASC 820-10-35-54J sets out what follows. Evidence a transaction wasn't orderly means placing little if any weight on the price. Evidence it was orderly means incorporating the price, weighted by volume, comparability and proximity to the measurement date. Genuine uncertainty means still considering it, with less weight than a transaction you know was orderly.
No branch lets you ignore the price. The weakest conclusion available is "consider it with less weight," and that needs a memo saying what about your own auction you couldn't establish.
The adjustments that hold up
None of this means the mark snaps to the headline price. Several adjustments are real, and documenting them is how you land a defensible number.
Unit of account. The legacy fund measures its own position. Neither ASC 820 nor IFRS 13 specifies the unit of account, and ASC 946 gives investment companies no explicit guidance either, so you measure consistently with how market participants would act in their own economic interest. If the vehicle acquired the whole asset while your fund held a minority position alongside co-investors, the deal price and your position aren't the same instrument. If your fund held the control stake sold, they largely are.
Control. The CFA Institute report records the LP view that where traditional M&A exits command a control premium, continuation vehicle prices reflect a [discount for lack of control](https://409.ai/articles/discount-lack-of-control-dloc-409a-gift-tax-valuation). Where the buyer took a non-controlling stake and your fund held control, that gap is a real adjustment, to be sized rather than asserted.
Structured consideration. Deferred payment is common, and the report describes buyers paying over time at a higher nominal price, with one market participant putting the typical split around 50% up front. A headline 92 paid half now and half in two years isn't 92 of fair value today. Discount the deferred leg, as you would an [earnout under ASC 805](https://409.ai/articles/earnout-contingent-consideration-valuation-asc-805).
Transaction costs. These aren't a component of fair value, so a vehicle can't carry the asset on its first balance sheet at cost including the fees it paid to close. Fair value right after close generally sits below capitalized cost, and that day-two markdown surprises first-time CV controllers.
What doesn't hold up is a general "secondaries discount" plugged in to preserve reported NAV. You can't define fair value as the price a market participant would pay, then exclude what a market participant actually paid because you think the market is wrong.
If the deal hasn't closed by your measurement date
This is the live problem for anyone closing Q3 books: these processes run for months, and quarter-ends land in the middle of them.
IPEV's treatment of indicative offers tracks a sliding scale. Offers "would rarely provide standalone evidence of Fair Value," since the valuer has to weigh the offeror's motivation: bids can be pitched high to open negotiations, or low where the offeror senses a pressured seller. Weight rises as the deal progresses toward a signed agreement and closing, and a negotiated price on an unclosed deal gets adjusted for the risk it doesn't complete.
The constraint that trips people up is the measurement date. Fair value rests on what was known or knowable then. A vehicle that signed 15 September and closed 20 October puts the signed price in scope for a 30 September mark. A lead selected on 10 October, from bids that came in through September, leaves you valuing on the bid evidence as at 30 September. So keep the bid log dated, along with the LPAC waiver, the fairness opinion and the purchase agreement. A reviewer asking in February why a 30 September mark differs from a 20 October closing price is answerable in a page if the chronology exists, and nearly unanswerable if not.
Calibration after close
For the vehicle itself, the transaction price starts an obligation rather than ending one. Calibration means tuning your model so it reproduces the entry price at the transaction date, then carrying those inputs forward. IPEV states plainly that calibration is required by accounting standards, and the AICPA's PE/VC valuation guide treats it the same way.
Concretely: if the vehicle bought in at 11.5x EBITDA while the comparable set traded at 13x, your model carries roughly a 12% discount to the comparable multiple. At the next measurement date you don't let that gap quietly close because comps moved. You keep it, or you explain what changed about the asset.
Classification rarely moves, since [one significant unobservable input keeps the whole measurement in Level 3](https://409.ai/articles/asc-820-level-3-classification-significant-unobservable-input). What improves is the evidence: a mark calibrated to a real negotiated price beats the same asset marked on multiples alone, and the mechanics are in our [guide to ASC 820 and the Level 3 problem](https://409.ai/articles/asc-820-level-3-fair-value-fund-portfolio-valuation).
What the auditor and the examiner each want
Your auditor works under AU-C 540, testing the assumptions behind an estimate rather than the estimate itself. Our walkthrough of [what an audit actually tests about a valuation](https://409.ai/articles/first-audit-409a-valuation-au-c-540-assumptions) covers the mechanics, with one addition. Where an observable transaction price exists for the measured asset and management's mark differs from it, that difference becomes the focus of the whole procedure. "The deal priced at a discount to NAV" is a conclusion. What gets tested is the bridge: deal price, deferred consideration, control, unit of account, and why the residual is zero.
The regulator's angle is separate. The SEC's [fiscal year 2026 examination priorities](https://www.sec.gov/files/2026-exam-priorities.pdf) name valuation among the core areas of adviser compliance programs that examinations evaluate, and return repeatedly to whether policies and procedures are reasonably designed to address conflicts of interest. The priorities don't single out continuation vehicles, and don't need to: a transaction where the adviser shapes the price on both sides, against its own reported NAV, already sits inside that framework.
One distinction to get right. The SEC's 2023 Private Fund Advisers Rules included an adviser-led secondaries rule requiring a fairness or valuation opinion for exactly these deals; the Fifth Circuit vacated those rules in full on 5 June 2024, so the requirement isn't law, though many sponsors and LPACs still ask for one. As the CFA Institute report notes, a *valuation opinion* opines on the value of the assets transferred, while a *fairness opinion* opines on the price negotiated with the lead investor. If your auditor wants support on value and your file holds only an opinion on the fairness of a price, you have a gap.
The practical sequence
Test the transaction against the five indicators in ASC 820-10-35-54I and answer each one. Fix your unit of account, and state whether the deal and your position are the same instrument. Adjust the headline price for deferred consideration, for control, and for anything about the transacted interest that differs from what you hold. Date everything. Then take the residual between adjusted price and mark, and either close it or explain it.
If the residual is large and the only explanation is that secondaries price at a discount, that isn't a valuation conclusion. It's a number you'd like to keep.
A continuation fund isn't a threat to your marks. It's the closest thing private markets offer to a market test of a position you've been estimating for years. Treat the price as evidence, adjust it properly, document the bridge, and you leave the audit with a stronger file than you brought in. Treat it as a deal outcome to reconcile later and you learn in February that the auditor already did the reconciliation, and reached a different number. The same holds on the company side, where a [tender offer or secondary sale](https://409.ai/articles/tender-offers-secondary-sales-409a-valuation) priced away from a carrying value is evidence to engage with, not explain away.
If you're marking Level 3 positions through a continuation fund process, [409.AI's ASC 820 portfolio valuation](https://409.ai/products/asc-820) is expert-reviewed and built around the quarter-end calendar rather than against it.