Private Market vs Public Market Valuation
Private market assets — unlisted equity, private credit, infrastructure — are valued using periodic appraisals based on comparable multiples or DCF models rather than continuous market prices, creating persistent valuation gaps versus their public market counterparts that can be positive or negative depending on the market cycle.
A fundamental difference between investing in listed securities and private market assets is the pricing mechanism. Listed stocks trade continuously on exchanges, with prices reflecting the aggregate view of all market participants in real time. Private market assets — shares in unlisted startups, private equity fund stakes, private credit instruments, commercial real estate — are priced infrequently by fund managers using methodologies like comparable public company multiples, recent transaction comparables, or discounted cash flow analysis.
This infrequent pricing creates what is sometimes called valuation smoothing. Because private market NAVs are updated quarterly or even annually, they do not fluctuate with daily market sentiment. During a public market selloff, private market funds may show stable or modestly declining reported values while their public market equivalents fall sharply. This apparent stability is partly real — private companies are insulated from short-term public market sentiment — and partly an artefact of stale pricing. In 2022, when global equities fell 20-30% and venture-backed technology companies were particularly hard hit, private equity and venture capital NAVs in India and globally were slow to mark down, creating a temporary premium of private to public valuations that subsequently corrected.
The opposite dynamic can occur in bull markets. High-growth private companies may be valued at steep premiums to comparable public companies, justified by the argument that they are growing faster and have not yet been subjected to the reporting and governance costs of public listing. Indian unicorn valuations during 2020-2022 frequently implied multiples that significantly exceeded listed comparable companies, a premium that was partially eroded during the post-pandemic correction.
For Indian investors in SEBI-registered AIFs, the valuation methodology is disclosed in the placement memorandum and must follow SEBI's AIF valuation guidelines. These require use of a consistent methodology, third-party valuation for larger positions, and disclosure to investors at the fund level. However, the inherent subjectivity of private valuations means that two funds holding comparable assets can report meaningfully different NAVs based on methodological choices.
The practical implication for portfolio construction is that private market allocations should not be benchmarked against public market indices on a short-term basis — the smoothed NAV makes such comparison misleading. Long-run internal rate of return (IRR) and public market equivalent (PME) metrics are more appropriate performance measures for private market funds.