Most private fund investments are Level 3 assets: their fair value rests on inputs no market quotes, such as projected cash flows, chosen multiples, and the GP’s own assumptions. Reading those marks well means knowing what the fair value hierarchy says, what the disclosures show, and how values move from one quarter to the next.
This guide explains the fair value hierarchy for LPs, the Level 3 disclosures in GP financial statements, how GPs value private holdings, and how to read cost, fair value, and quarterly movements.
Key takeaways
- Level 3 means unobservable inputs. The fair value hierarchy in ASC 820 ranks inputs from quoted prices (Level 1) to assumptions no market provides (Level 3).
- Private fund disclosures are lighter. Since ASU 2018-13, nonpublic entities, including many private funds, show Level 3 purchases, issues, and transfers instead of a full roll-forward.
- Cost is a reference point, not a value. Compare fair value with cost and with the previous quarter, and read the reason for each change.
- A recent round is a calibration input. The IPEV Valuation Guidelines treat the price of a recent investment as a check on the valuation, not a default fair value.
- Marks arrive late. Quarterly values reach LPs 45 to 90 days after quarter end and can rest on company financials from an earlier period.
What are Level 3 assets?
ASC 820, the US GAAP standard on fair value, sorts fair value measurements into three levels by the inputs behind them. Level 3 assets are those valued mainly with unobservable inputs, which reflect the reporting entity’s own assumptions about what market participants would pay.
| Level | Inputs | Typical examples in a private fund |
|---|---|---|
| Level 1 | Quoted prices in active markets for identical assets | Listed shares a fund still holds after an IPO |
| Level 2 | Observable inputs other than Level 1 quotes | Some traded loans and instruments priced from observable rates |
| Level 3 | Unobservable inputs that reflect the entity’s own assumptions | Private company equity and most private loans |
| Measured at NAV | Net asset value used as a practical expedient, outside the hierarchy | Interests in other funds, held by funds of funds |
Funds that hold interests in other funds often measure them at NAV under the practical expedient, which keeps those interests outside the three levels. Our guide to the NAV practical expedient under ASC 820 covers that treatment.
What Level 3 disclosures tell you
Valuation techniques
- The techniques used for each class of investment: market multiples, discounted cash flows, recent transactions.
- Any change in technique during the period.
Significant unobservable inputs
- Quantitative information such as EBITDA multiples and discount rates.
- Public entities add the range and weighted average; nonpublic entities are exempt from that part.
Level 3 activity
- Nonpublic entities: purchases, issues, and transfers into and out of Level 3, with reasons for transfers.
- Public entities: a full roll-forward of Level 3 balances.
Fair value by level
- Investments split across Level 1, Level 2, Level 3, and NAV.
- The share in Level 3 shows how much of the fund rests on judgment.
The Level 3 numbers tie back to the schedule of investments: the holdings there carry the fair values these notes explain.
How GPs value private holdings
Most private equity and venture GPs apply the IPEV Valuation Guidelines alongside ASC 820 or IFRS 13. The common techniques are market multiples of earnings or revenue, discounted cash flows, and, for some assets, net assets. Our article on valuation methods for private equity explains each one.
- Calibration. When the entry price was fair value, the GP tests the techniques it will use later against that price, so later marks start from assumptions consistent with the deal.
- Recent transactions. A new financing round or a sale of shares is evidence, not an automatic mark. The guidelines treat the price of a recent investment as a calibration point.
- Backtesting. When a holding is sold, GPs compare the exit price with recent fair values to check how well their process worked.
The IPEV Board updates the guidelines from time to time, so check which edition each GP applies.
How to read quarter-over-quarter marks
A single fair value tells you little. The sequence tells you more: how the value moved against cost, what drove each change, and whether the explanation is consistent from quarter to quarter.
Example: four quarters of marks ($000)
| Quarter end | Cost | Fair value | Change | Change % | Fair value / cost | Main driver |
|---|---|---|---|---|---|---|
| September 30, 2025 | 37,500 | 41,250 | 1.10x | Starting point | ||
| December 31, 2025 | 37,500 | 39,000 | (2,250) | (5.5%) | 1.04x | Lower peer multiples |
| March 31, 2026 | 37,500 | 36,000 | (3,000) | (7.7%) | 0.96x | Lower EBITDA |
| June 30, 2026 | 37,500 | 33,020 | (2,980) | (8.3%) | 0.88x | Lower EBITDA and multiples |
Portfolio Company C, the industrial machinery holding from our schedule of investments example, went from 1.10x cost to 0.88x in three quarters, a 20.0% fall in fair value. The first step down came from lower peer multiples, a market effect. The next two came from lower EBITDA, a company effect. The second kind matters more for the eventual exit.
Illustrative example. Portfolio Company C and its marks are fictional. Negative changes in parentheses.
Questions to ask when a mark moves
- What drove the change: market multiples, company results, a transaction, or a change in method?
- Which period’s company financials does the mark use?
- Did the technique or a significant input change, and why?
- If another of your GPs holds the same company, does its mark move the same way?
Signals worth a question
- Marks that never move. A holding at cost or at its last round price for several quarters, while comparable companies moved, may not have been revalued.
- Jumps without a reason. A large write-up without a transaction or a clear change in results needs an explanation, especially ahead of a fundraise.
- Method changes. A switch from multiples to discounted cash flows can move a value without anything changing in the business.
- Different marks for the same security. Two GPs can value the same company differently. Our guide to concentration risk across GPs covers how to read the gap.
- Year-end true-ups. Large changes at the audited year end, compared with the quarterly marks before it, show how much the unaudited values moved.
How FundCount helps you track GP marks
FundCount AI Document Intelligence collects statements from your investor portals and email, converts them into accounting-ready data, and posts them to your books, with the source document one click from each posted figure. It now also extracts the schedule of investments from GP financial statements, including cost and fair value for each holding, and tracks how they move from quarter to quarter.
- Extracts asset-level data from GP financial statements: security name, industry, country, round or share class, shares, cost, and fair value.
- Tracks quarter-over-quarter movements in cost and fair value for each holding.
- Shows exposure by industry, country, and share class, filtered by year, quarter, fund, and holding company.
- Shows where the same security appears across different GPs.
- Keeps co-investments, valued from their own schedules of investments, next to fund holdings.
The extracted data sits in the same platform that runs FundCount’s portfolio accounting, partnership accounting, and reporting, used by family offices and by the fund administrators that report to LPs.
Watch-outs
- FundCount extracts what each GP discloses. Grouped lines in a condensed schedule stay grouped until the GP provides the names.
- Holdings data covers what each fund owns and what it is worth. Company KPIs such as revenue and EBITDA come from GP portfolio company updates.
Track every holding’s marks across quarters and GPs
In a guided walkthrough on real-world scenarios, we extract schedules of investments from GP financial statements and show a holding’s cost and fair value movements over several quarters.
FAQs
What are Level 3 assets?
Assets whose fair value rests mainly on unobservable inputs, such as projected cash flows, chosen multiples, and the reporting entity’s own assumptions. Most private company investments are Level 3.
Why are most private equity investments Level 3?
Private companies have no quoted price, so GPs estimate fair value with models whose key inputs no market provides directly.
What is the difference between Level 2 and Level 3?
Level 2 uses observable inputs, such as quoted prices for similar assets or market rates. Level 3 relies on significant unobservable inputs.
Are interests in other funds part of the fair value hierarchy?
Not when they are measured at NAV under the practical expedient in ASC 820. Those interests are shown outside the three levels.
What does a Level 3 roll-forward show?
The movement in Level 3 balances during the period: purchases, sales, gains and losses, and transfers. Public entities present it. Nonpublic entities, including many private funds, disclose purchases, issues, and transfers instead.
How often are private equity investments revalued?
Usually every quarter. ILPA’s reporting standards expect the schedule of investments in each quarterly package to carry updated valuations, and the year-end values are audited.
Sources and methodology
Sources: FASB ASC 820 and ASU 2018-13 on fair value disclosures, as summarized by accounting firms; the IPEV Valuation Guidelines (December 2022 edition) and practitioner summaries of calibration and backtesting; ILPA Quarterly Reporting Standards, Best Practices, version 1.0 (October 2011). FundCount capabilities come from FundCount’s product documentation and client announcements, reviewed in October 2026.
Example: Portfolio Company C and its marks are fictional and end at the value shown in our schedule of investments example.
Scope: general information, not investment, accounting, or legal advice.
Published: October 2026.
