“For all fund investors, NAV is supposed to stand for ‘net asset value.’ For some, however, it’s turning out to mean ‘not actual value.’”
In this installment of our newsletter, we wade into the ever-murky waters of alternative investments, specifically Private Equity. Alternatives have been enjoying a bit of a media glow-up lately, as the current administration and several well-known Wall Street firms lobby to make them available inside retirement plans like 401(k)s.
We remain, let’s say, politely skeptical. As we outlined last summer in “From Market Reality to Model Assumptions to Mythical Value,” private equity valuations often rely on infrequent, model-driven “marks” rather than real, live, cash-changing-hands market prices. The result can be a soothing illusion of stability: less volatility, fewer squiggles on the chart, and a comforting calm that may or may not survive contact with reality.
Add in illiquidity, complexity, opacity, high fees, and tax inefficiencies, and the long-term benefit to plan participants becomes questionable at best. That said, some recent developments – particularly around liquidity and fund structure – are worth examining.
Private Equity: A Primer
If it’s “private” but everyone has access … is it really private?
Private equity (PE) involves professional managers pooling investor capital to buy private companies (or take public ones private), “improve” them (a term that often includes leverage) and, eventually, sell them for a profit. Traditional PE funds are typically closed-end vehicles with:
- a fixed lifespan (often 10+ years – longer than some home mortgages)
- capital calls (you commit today, they take your money later)
- distributions that arrive only after assets are sold (patience is required)
These long horizons allow managers to focus on operational improvements, strategic repositioning, and financial engineering – without the daily judgment of public markets or CNBC chyrons.
The persistent challenge? Valuation. Reported NAVs are usually based on internal models or infrequent appraisals, not observable market prices. When those calm, carefully modeled values finally meet a real transaction – such as a public listing or secondary sale – the difference between “what it was marked at” and “what someone will actually pay” can be … enlightening. More on that shortly.
Evergreen Private Equity Funds
Evergreen funds are perpetual or open-ended vehicles with no set end date. They continuously raise capital, invest it, and (in theory) offer periodic liquidity. Key features include:
- Ongoing investing and limited liquidity: Investors may enter or request redemptions at scheduled intervals, often subject to gates, queues, and polite reminders that liquidity is “not guaranteed.”
- Continuous deployment: Capital is typically invested immediately rather than sitting idle awaiting capital calls.
- NAV-based pricing: Assets are valued regularly but, again, based on estimated NAV rather than actual transactions.
Why Evergreen?
- They broaden access to private equity (lower minimums, periodic liquidity).
- They reduce the early drag of fees on uninvested capital, known as the “J-curve,” by starting with fully invested capital.
- They appeal to investors who want private market exposure without locking up funds until their kids graduate from college.
That said, evergreen funds still rely on model-based valuations and share the same opacity as traditional PE. The true, realizable value often only becomes clear when assets are sold – or when they’re forced to meet the public markets.
Transitions from Private to Public — The Cold, Bloodless Verdict of the Market
Many funds start out as nontraded entities that only provided limited liquidity at specific times, with the right to halt redemptions or limit them to a certain percentage. To provide clients with liquidity without the typical restrictions, some managers have taken their shares to the market, which is akin to throwing their customers to the wolves. American financial journalist Jason Zweig argues that recent attempts to take private-asset funds public have exposed a harsh reality: the apparent stability of private-market valuations often vanishes the moment those assets are subjected to real market pricing.
Funds that were marketed as low-volatility and steadily valued saw sharp price declines once investors could trade them freely, revealing a significant gap between stated NAV and what the market would actually pay.
“On Dec. 16, what used to be a nontraded portfolio called Bluerock Total Income+ Real Estate Fund began trading on the New York Stock Exchange as the Bluerock Private Real Estate Fund (BPRE). With a stated net asset value of $24.36 a share, the fund closed at a market price of $14.70 – a 39.7% discount from NAV. For every dollar the fund manager said your shares were worth at 9:30 a.m., the stock market was willing to pay you only 60 cents by 4 p.m.”
These transitions undermine Wall Street’s promise that investors can enjoy both smooth, non-volatile pricing and daily liquidity. Zweig’s conclusion is blunt: investors can choose stable-looking prices or easy access to their money – but not both at the same time. The episode reinforces skepticism that private-market NAVs consistently reflect true, realizable value, something that only becomes clear when public markets get a vote.
In Closing
As a stark reminder of the difference between self-professed value and market reality, the Bluerock Private Real Estate Fund began trading publicly and immediately fell nearly 40% below its stated NAV, validating our concerns. At Forza, we prefer liquid assets with observable prices, where value is set not by assumptions or appraisal schedules but by real buyers and sellers voting with real capital. In markets with broad participation, price discovery isn’t a theory – it’s a fact.