When the Mark Gets Questioned
The moment arrives in different forms. An auditor returns to a fair value conclusion with a request for additional support on the methodology applied to a Level 3 position. An institutional limited partner, conducting its own due diligence on the fund, asks how the manager arrived at a particular mark, and the answer that seemed sufficient at the time of the quarterly report no longer holds up to scrutiny. A co-investor examining the same holding under its own valuation policy reaches a different number, and the discrepancy becomes a conversation that no one in the room anticipated. In each of these moments, fund managers face the same underlying problem: the valuation conclusion exists, but the analytical framework supporting it has not been independently tested.
These are not hypothetical scenarios. They reflect the recurring friction points that arise when portfolio valuation rests on internally-developed estimates that have not been subjected to rigorous third-party review. The pressure is not always external. Fund managers themselves carry the weight of knowing whether their marks will hold when examined closely. A single challenged position can consume significant time, create tension with limited partners, and invite a level of scrutiny that extends well beyond the position at issue.
What positive assurance provides is not a different answer. It is independent confirmation that the answer already reached is reasonable, and, where the analysis indicates it is not, an early and documented signal that lets the manager address the issue. Fund managers who engage in this process are better positioned to present marks with clarity, respond to questions from auditors and investors without qualification, and carry their valuations through the review cycle with confidence.
Affirmative Opinion, Not Just a Review
Positive assurance, in the context of portfolio valuation under ASC 820, is an independent practitioner’s conclusion that a reported fair value estimate falls within a reasonable range and has been determined in conformity with applicable accounting standards and sound valuation methodology. Unlike a negative assurance opinion, which confirms only that nothing came to the practitioner’s attention suggesting the value is unreasonable, positive assurance requires affirmative, evidence-based support for the conclusion. The practitioner conducts an independent analysis, applies appropriate valuation techniques, evaluates the reasonableness of key inputs and assumptions, and issues a formal conclusion on the reasonableness of the reported value. It is, in substance, an independent valuation review that culminates in a stated opinion, and it is designed specifically to support the rigor that audit firms, limited partners, and institutional investors now expect of fund managers reporting fair value under ASC 820.
The Gap that Internal Processes Cannot Close
Internal valuation processes, even well-constructed ones, carry an inherent limitation: they are developed and applied by the same organization that has an economic interest in the outcome. That is not an indictment of any particular fund’s approach. It is a structural reality of how portfolio companies are managed and reported. Audit firms are acutely aware of this limitation, and the scrutiny applied to Level 3 positions has intensified considerably as auditors have developed more sophisticated understanding of private equity and credit fund structures. When a fund enters its audit process without independently-supported fair value conclusions, the burden of proof falls entirely on the fund’s own documentation, and that documentation is frequently insufficient to satisfy an auditor’s requirement for evidence independent of management’s assumptions.
Relying on existing advisors (legal counsel, fund administrators, or the fund’s own finance team) does not address this gap. These parties are either not equipped to render a valuation opinion or are not positioned to do so independently. A fund administrator who aggregates and reports values does not provide the analytical support that positive assurance requires. The fund’s finance team, however technically proficient, cannot offer the independence that auditors and investors require when evaluating whether a fair value conclusion is defensible. Doing nothing, or deferring this analysis until it is specifically requested, creates the conditions under which a single challenged position escalates into a broader review of the fund’s valuation practices.
Positive assurance fills a gap that neither internal resources nor general advisors are designed to address. It provides fund managers with an independent conclusion on the reasonableness of their reported marks, documented in a form that satisfies audit requirements and withstands investor scrutiny, before the moment when it is needed most. The value is not that it prevents difficult questions; it is that it equips fund managers to answer them.
Five Scenarios That Move This to the Front Burner
Positive assurance moves from background knowledge to an active need under the following conditions:
▪ Audit preparation for funds with significant Level 3 holdings. When the proportion of the portfolio subject to unobservable inputs is material, auditors increasingly expect independent support for fair value conclusions rather than reliance solely on management’s analysis.
▪ Capital raises and LP due diligence. Institutional limited partners (particularly pension funds, endowments, and fund-of-funds) conduct valuation diligence as part of their own governance obligations. A fund that can present independently-supported marks is better positioned in this process than one that cannot.
▪ Transactions involving fund interests. Secondary market transactions, GP-led restructurings, and continuation fund formations require fair value determinations that are credible to all parties. Buyer and seller alike benefit from a conclusion that neither party produced unilaterally.
▪ Disputes or disagreements over reported values. When a co-investor, a departing partner, or a counterparty in a negotiated transaction challenges a reported mark, an independently-supported conclusion provides a foundation for resolution that a management-prepared estimate does not.
▪ New fund launches or first-time institutional audits. Funds establishing their valuation processes for the first time, or undergoing their first audit with a nationally-recognized firm, benefit from engaging positive assurance early, before their methodologies are tested under audit conditions.
Key Considerations
The Distinction Between Methodology and Conclusion
Not all valuation reviews are equivalent. Some practitioners will assess whether a fund’s general methodology is reasonable without providing a conclusion on any specific position. Positive assurance requires more: the practitioner must reach an affirmative conclusion that a specific value, or a range of values, is reasonable for a specific holding at a specific measurement date. Fund managers should understand this distinction when evaluating what form of independent support their circumstances require.
The Role of Documentation
The strength of a positive assurance opinion depends substantially on the quality of the underlying documentation. A practitioner cannot render an independent conclusion without access to the financial information, market data, transaction history, and management assumptions that inform the valuation. Fund managers who invest in maintaining organized, well-documented valuation files are better positioned to engage this process efficiently and to derive maximum analytical benefit from it.
Timing Within the Reporting Cycle
Positive assurance engaged after the fact, after a value has been reported and questioned, is a more difficult and typically less efficient process than one that runs alongside the fund’s quarterly or annual close. Fund managers who build independent review into their valuation calendar, rather than treating it as a response to external pressure, maintain greater control over timing, scope, and outcome.
Calibration to Portfolio Complexity
Not every position in a portfolio presents the same valuation complexity. Positive assurance is most commonly applied to holdings where observable market data is limited, where the underlying business has experienced material developments since the prior measurement date, or where the valuation methodology involves significant judgment. Fund managers should approach the scoping of a positive assurance engagement with an understanding of where the analytical risk in their portfolio is concentrated.
The Houlihan Capital Approach
Houlihan Capital’s positive assurance practice is structured around the requirements of the audit environment, not around a generalized valuation methodology. This distinction matters. Engagements are scoped with an understanding of the specific audit standards applicable to the fund’s reporting obligations, the level of documentation that the fund’s auditors have historically required, and the form of conclusion that will be most useful when the fund enters the audit process. Rather than delivering a valuation report that addresses what Houlihan believes to be relevant, the engagement is structured to address what the fund’s auditors and investors will actually ask, because those questions are known, and they are answerable with the right preparation.
The firm’s approach also reflects its position as an independent, employee-owned advisory firm with no investment banking, lending, or asset management interests that would introduce a conflict into a fair value conclusion. For fund managers, the credibility of a positive assurance opinion depends on the practitioner’s demonstrated independence from the fund, its general partner, and its portfolio companies. Houlihan’s structure provides that independence cleanly, without the organizational complexity that characterizes larger firms where independence may require formal screening procedures. Engagements are led by senior practitioners with direct experience across private equity, private credit, and real assets: the asset classes where Level 3 valuation complexity is most acute.
This service is distinct from Houlihan’s broader portfolio valuation advisory, which may encompass quarterly or annual valuation support across a fund’s entire portfolio on an ongoing basis. Positive assurance is a specific, opinion-based engagement (it produces a formal conclusion, not an advisory recommendation), and it is designed for the circumstances in which an opinion, rather than a consultation, is what the situation requires. It is also distinct from transaction opinions such as fairness opinions or solvency opinions, which address different questions at different points in a transaction or capital structure lifecycle.
Walking Away Better Prepared
Fund managers who have navigated an audit with independently-supported fair value conclusions understand what the process makes possible. The audit conversation changes. The investor question about a specific mark becomes a conversation about methodology rather than a challenge to a number. The co-investor who arrives at a different value has a credible, independently-supported conclusion to measure against. None of this eliminates the judgment inherent in fair value measurement. That judgment is the point. But it means the judgment has been tested, documented, and independently supported before it is examined by someone with a reason to question it.
What practitioners gain from this process is not simply a document. It is the capacity to defend their marks from a position of analytical preparation rather than reactive explanation. That capacity (available at the audit, the investor call, the transaction table) is what positive assurance is designed to produce.
Start the Conversation
Fund managers preparing for an audit cycle, a capital raise, or a GP-led transaction are welcome to reach out directly to discuss the role positive assurance may play in their process.
Ryan Martindell
Vice President
rmartindell@houlihancapital.com
