How to Navigate Portfolio Company Valuation Like a Pro
If you handle financial reporting for an investment fund, you already know that ASC 820 and ASC 946 valuation standards demand valuation acumen and transparency—and the process of gathering portfolio company information and producing audit ready valuations isn’t exactly a walk in the park. Audit scrutiny, limited resources, complex investments, and software limitations put finance teams under pressure to determine and defend their fair value estimates. And things get even trickier when you’re working with illiquid or hard-to-value assets such as privately held portfolio companies.
The reality is that internally prepared valuations are not always enough. Auditors won’t just take your numbers at face value—they want clear methodologies and solid evidence to back up every assumption. Without third-party validation, venture funds and private equity (PE) fund managers risk drawn-out audits and increased scrutiny. Let’s break down the biggest challenges of ASC 820 and ASC 946 and why outsourcing valuations to experts like Redwood Valuation can make all the difference.
Validation Predicament: Auditors Need More Than Your Word and LPs want Confidence in the Values
ASC 820 allows fund managers to determine their own fair value estimates related to their portfolio companies, but that creates an obvious conflict of interest. Auditors know this, which is why they need more than just a fund’s internal calculations to get comfortable with concluded values. They want to see thorough documentation, transparent methodologies, and strong supporting data.
Without an independent valuation, finance teams face a constant back-and-forth, trying to justify numbers that might not hold up under scrutiny. The more subjective the valuation, the more pushback they can expect from auditors—dragging out the audit process and creating unnecessary stress.
Further, limited partner investors (LPs) in funds often pose operational questions when considering whether to invest with an asset manager, such as: What are the firm’s valuation policies? Does it conform to industry practice and literature? Does it hire an outside firm to help conduct valuations? How PE and venture fund leaders address these questions has a major impact in building and maintaining LP’s confidence throughout the life of a fund and future funds.
Third-party valuations eliminate this friction, providing objective, defensible reports that come to reasonable values using best practice methodology that auditors prefer and inspire the confidence of limited partners.
The Audit Process: A Never-Ending Q&A
Developing valuations under ASC 820 and ASC 946 is not just about crunching the numbers—it’s about proving they hold up under scrutiny. That means delivering airtight analysis, defending every assumption, and making sure valuation methodologies are solid. For finance teams already managing tax planning, investor relations, and reporting deadlines at year-end, audit season can feel like a full-time job on top of everything else.
And if a valuation is not audit-ready? Expect a long, frustrating review process. Auditors don’t just skim the numbers—they dig deep and keep asking questions.
Redwood Valuation expert Tim Montgomery sees this all the time. “For internally prepared analyses, getting through an audit is often harder than the valuation itself. If the fund doesn't provide strong, defensible valuations upfront, they can spend weeks answering follow-up questions and reworking reports.”
Independent valuations remove this burden. With audit-ready reports from Redwood Valuation, fund managers can provide auditors with well-documented, defensible valuations—reducing review delays and ensuring confidence in reported figures.
Finance Teams Are Stretched Thin and Valuations Make It Worse
Finance teams already have enough on their plate. Between financial reporting, forecasting, and managing investor expectations, adding fair value assessments to the mix is just another layer of stress. And in many cases, fund managers don’t have a dedicated valuation team, so the responsibility falls to finance teams that are already stretched thin.
Without the right expertise, valuations can be rushed, inconsistent, or full of gaps—exactly the kind of thing that triggers concern during the audit process. Instead of a smooth review process, teams end up trying to defend inputs that are based on gut feel or subjective factors that may be well informed based on the general partners extensive knowledge of the portfolio company, but are difficult to substantiate.
Montgomery puts it simply, “Most funds don’t want to hire an in-house valuation team. They outsource because valuations aren’t just about numbers—they require deep expertise and airtight documentation that most finance teams don’t have time for.” Having a documented independent perspective is the icing on the cake of support during a busy time of year.
By outsourcing to experienced professionals, fund finance teams gain confidence that their fair value estimates are transparent and audit-ready—eliminating unnecessary stress. More importantly, they free up their internal teams to focus on strategy and growth, rather than getting bogged down in valuation minutia.
Complex Investment Structures: No Comps, No Revenue, No Easy Answers
Valuing illiquid or unique assets is one of the biggest challenges in ASC 820 fair value measurement, whether for an early-stage venture fund or a late-stage private equity investor. When a portfolio company lacks a recent funding round, market comps, and/or is pre-revenue, determining fair value isn’t straightforward. It often feels more like an art than a science, and the range of reasonable values becomes wide. In these situations, it’s even more crucial to have evidence that supports the reported investment value.
Auditors expect valuations to be backed by extensive evidence, but without clear metrics, the process becomes highly subjective. Any inconsistencies or weak justifications can raise red flags, leading to deeper scrutiny.
This is where third-party valuation experts make a difference. Professionals with deep experience in complex investment structures apply the right methodologies to produce well-documented, market-driven valuations that auditors and investors can trust. Instead of struggling to justify fair value estimates, private equity finance teams can rely on independent experts to provide valuations that hold up under audit review.
Valuation Software Isn’t a Silver Bullet
Some venture funds turn to valuation software to streamline the process, and while automation has its benefits, it’s not a substitute for expert analysis. Valuation software can generate fair value estimates quickly, but when auditors start asking questions, finance teams still need to explain how they got those numbers.
Montgomery sees this problem often. “When auditors start digging into a valuation, finance teams can find themselves trying to defend calculations they didn’t actually create. Software is a useful tool, but it’s not a replacement for expert validation.”
The best approach? Leverage a valuation firm that uses cutting-edge financial models combined with professional expertise. This ensures valuations are transparent, accurate, and audit-ready with the benefit of hands-on audit review support.
The Bottom Line: Navigating ASC 820 and ASC 946 Doesn’t Have to Be This Hard
Private company valuation and ASC 820 reporting can be complex, but venture funds don’t have to go through it alone. Independent valuations from third-party experts reduce audit friction, save time, and ensure fair value estimates hold up under scrutiny. Beyond compliance, leveraging third-party expertise provides limited partners with greater confidence that valuations are objective, reliable, and backed by a rigorous, defensible process.
For a smoother audit process with fewer complications, outsourcing is the smart move. Redwood Valuation specializes in audit-ready fair value assessments, helping managers of venture capital and private equity funds navigate the valuation process, without the stress.
If your team is feeling the pressure of navigating ASC 820 and ASC 946 requirements, get in touch with Redwood Valuation today to learn how we can help.