Secondary bids are quoted on a reference NAV that is months old. Rolling it forward for cash and for markets shows what discount the buyer is really paying.
Start from the reference NAV, add capital called since that date, deduct the part of it spent on fees and the distributions paid, then apply your estimate of how far the remaining holdings have moved with public markets. On an illustrative interest with a 31 December NAV of 100, calls of 4.0, distributions of 10.0 and a 9 per cent index rise, the NAV rolls forward to 99.29. An 88 per cent bid on that current value is quoted as 93.38 per cent of the reference NAV: a 6.6 per cent headline discount for a buyer still paying 12.
Worked in full in The Private Equity Secondaries Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The reference NAV is the last one the manager reported, usually one or two quarters old by the time bids are due. Every secondary price is quoted against it, and every serious buyer prices something else: what the interest is worth on the day the money changes hands. The roll-forward is the bridge between the two numbers, and it is why quoted discounts swing with public markets more than buyers' return targets do.
| Input | Value |
|---|---|
| Reported NAV at the reference date | 100.0 |
| of which private company holdings / net cash and other | 96.0 / 4.0 |
| Capital called since the reference date | 4.0 |
| of which management fees and expenses | 0.9 |
| Distributions since the reference date (exits at carrying value) | 10.0 |
| Public index return since the reference date | 9.0% |
| Buyer's beta of the marks to the index | 0.80 |
| Buyer's bid on rolled-forward value | 88% |
Cash-adjusted NAV = reference NAV + calls − fees and expenses − distributions
= 100.0 + 4.0 − 0.9 − 10.0 = 93.1
Fees are funded by the call but buy nothing, so 3.1 of the 4.0 called adds value and 0.9 does not. The 10.0 distributed came out of holdings sold at their carrying value, leaving 86.0 of the original portfolio.
The manager will not re-mark the companies until the next quarter-end, but the buyer has to price today. The usual shortcut applies an index move to the holdings still in the fund, scaled by a beta that reflects how far private marks tend to follow listed comparables.
Market adjustment = remaining holdings × beta × index return
= 86.0 × 0.80 × 9.0% = 6.19
Rolled-forward NAV = 93.1 + 6.19 = 99.29
In Excel, with the reference NAV in B1, calls in B2, fees in B3, distributions in B4, remaining holdings in B5, beta in B6 and the index move in B7: =B1+B2-B3-B4+B5*B6*B7.
A buyer underwriting company by company replaces this line with its own marks; the shortcut is for screening a portfolio or checking that a bottom-up view and the market agree. The full rebuild is worked in how to price an LP interest on a bottom-up NAV.
The buyer wants to pay 88 per cent of current value: 0.88 × 99.29 = 87.38 at closing. But the purchase agreement states a price as a percentage of the reference NAV, then adjusts it for cash flows since that date: plus calls, minus distributions.
Quoted price = cash at closing − calls + distributions
= 87.38 − 4.0 + 10.0 = 93.38 per cent of the reference NAV
A buyer who simply bid 88 per cent of the reference NAV would hand over 88.0 + 4.0 − 10.0 = 82.0 at closing, 82.6 per cent of current value. In a rising market the naive bid is 5.38 below what the buyer was willing to pay, and it loses the deal.
Hold everything constant except the index return. The buyer's economic bid stays at 88 per cent of current value throughout; only the quoted number moves.
| Index move | Market adjustment | Rolled-forward NAV | Cash at closing | Quoted price | Quoted discount |
|---|---|---|---|---|---|
| -15% | -10.32 | 82.78 | 72.85 | 78.85 | 21.2% |
| -5% | -3.44 | 89.66 | 78.90 | 84.90 | 15.1% |
| 0% | 0.00 | 93.10 | 81.93 | 87.93 | 12.1% |
| +9% | 6.19 | 99.29 | 87.38 | 93.38 | 6.6% |
| +15% | 10.32 | 103.42 | 91.01 | 97.01 | 3.0% |
The same 12 per cent economic discount is reported anywhere from 3.0 to 21.2 per cent. Much of what is published as "secondary pricing tightened" or "widened" in a given half-year is the stale reference date, not a change in what buyers demand.
The beta is the judgment call. At a 9 per cent index move, a beta of 0.50 gives a rolled-forward NAV of 96.97 and a quoted price of 91.33; a beta of 1.00 gives 100.84 and 94.74. Two buyers with identical return targets can be 3.41 points apart on this line alone.
Price the interest on the day you pay for it, then translate back to the reference NAV the market quotes. Here a 100 NAV becomes 99.29 and an 88 per cent bid becomes a 93.38 quote. The Private Equity Secondaries Investor builds its bids from a NAV rolled forward and rebuilt company by company, and the free workbook for this case sits beside a printable bid one-pager that starts from the NAV rolled forward.
Partly arithmetic. Bids are quoted against a reference NAV struck months earlier, while buyers price current value. In the example, a 9 per cent index rise lifts the rolled-forward NAV to 99.29 and an unchanged 12 per cent economic discount is quoted as a 6.6 per cent discount to the reference NAV. After a 15 per cent fall the same bid is quoted at a 21.2 per cent discount.
A view, not a constant: how far the manager's next marks will follow listed comparables, usually below one because private marks lag and smooth. On 86.0 of remaining holdings and a 9 per cent index move, a beta of 0.50 adds 3.87, 0.80 adds 6.19 and 1.00 adds 7.74, a 3.41 point range in the quoted price.
Yes. Fees and expenses paid since the reference date are funded by capital calls but add no value, so they enter the call but not the NAV. In the example 0.9 of the 4.0 called went to fees, so the cash-adjusted NAV is 93.1, not 94.0, before any market adjustment.
This article is one calculation from The Private Equity Secondaries Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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