Portfolio valuation
NAV and liquidity considerations
NAV and liquidity considerations
Net Asset Value (NAV) is the headline number LPs track. It determines reported returns, management fees, and how your fund compares to peers. This page covers how to calculate NAV for ABF funds, the timing and frequency considerations, and how to handle liquidity adjustments.
NAV components
NAV is simply assets minus liabilities. For an ABF fund, the components are:
NAV = Portfolio Fair Value
+ Cash and Cash Equivalents
+ Accrued Interest Receivable
+ Other Assets
- Leverage (borrowings, repo, credit facilities)
- Accrued Expenses
- Accrued Fees (management, incentive)
- Other LiabilitiesComponent details
| Component | What It Includes |
|---|---|
| Portfolio fair value | All investment positions, marked per your valuation methodology |
| Cash and equivalents | Bank deposits, money market funds, treasuries held for liquidity |
| Accrued interest receivable | Interest earned but not yet received on investments |
| Other assets | Prepaid expenses, receivables, other current assets |
| Leverage | Credit facility draws, repo borrowings, term debt |
| Accrued expenses | Audit, legal, custody, admin fees accrued but not paid |
| Accrued fees | Management and incentive fees owed to GP |
| Other liabilities | Pending settlements, payables |
Worked example
| Component | Amount |
|---|---|
| Portfolio fair value | $487.3M |
| Cash | $12.8M |
| Accrued interest receivable | $4.2M |
| Total assets | $504.3M |
| Credit facility outstanding | ($125.0M) |
| Accrued expenses | ($0.8M) |
| Accrued management fee | ($1.2M) |
| Total liabilities | ($127.0M) |
| NAV | $377.3M |
For a fund with 10M units outstanding, NAV per unit = $37.73.
Timing and cut-off
Valuation cut-off
Positions are valued as of a specific date, typically:
- Month-end for monthly NAV funds
- Quarter-end for quarterly NAV funds
All market data, performance data, and assumptions should reflect information available as of the cut-off date. You should not use information from after the cut-off to adjust marks, unless you are disclosing a “subsequent event” that materially affects value.
Publication timeline
| Fund Type | Typical Publication |
|---|---|
| Open-end credit fund | T+15 to T+20 business days |
| Closed-end credit fund | T+20 to T+30 business days |
| Interval fund | Aligned with repurchase offer (typically 5 business days before) |
| BDC | SEC filing deadline (45-60 days post quarter-end) |
Your LP agreement or fund documents will specify the publication timeline. Build backward from the deadline to set internal deadlines for position marks, committee review, and final approval.
Preliminary vs. final NAV
Some funds publish a preliminary NAV quickly, then a final NAV after all positions are marked:
| NAV Type | Timing | Use |
|---|---|---|
| Preliminary | T+5 to T+10 | Liquidity planning, early estimate |
| Final | T+15 to T+30 | Official reporting, fee calculation |
The preliminary NAV may use estimates for hard-to-value positions or carry prior marks forward. Disclose clearly that it is preliminary and subject to change.
Frequency by fund type
| Fund Type | Typical Frequency | Driver |
|---|---|---|
| Open-end credit fund | Monthly | LP redemption rights, continuous pricing |
| Closed-end credit fund | Quarterly | LP reporting cycle, audit requirements |
| Interval fund | Quarterly | SEC requirement, repurchase offer timing |
| BDC | Quarterly | SEC requirement |
| Separately managed account | Per agreement | Client preference, often quarterly |
More frequent NAV calculation means more valuation work. Monthly NAV funds need efficient processes and may use more automation or pricing service marks for liquid positions.
Side pockets
Side pockets segregate illiquid or hard-to-value positions from the main portfolio. They are a governance tool for handling positions that do not fit the standard NAV process.
When to use side pockets
| Situation | Why Side Pocket |
|---|---|
| Position becomes truly illiquid | Cannot reasonably value on normal cycle |
| Material uncertainty about recovery | Distressed, litigation-dependent, or restructuring |
| Different investor exposure | Some LPs have exposure, others do not |
| Regulatory or legal hold | Position cannot be freely traded |
How side pockets work
Side-pocketed positions:
| Feature | Treatment |
|---|---|
| Valuation | Valued separately, often at cost, distressed estimate, or zero |
| NAV impact | Do not affect the main NAV calculation |
| LP disclosure | Must be disclosed to LPs, shown separately |
| New capital | Cannot receive new investor capital |
| Redemptions | Not included in redemption calculations for main NAV |
| Fee treatment | May be excluded from management fee base (varies by agreement) |
When to release from side pocket
Positions should be released from side pocket when:
- Liquidity returns (position can be traded)
- Uncertainty is resolved (restructuring complete, litigation settled)
- Value can be reasonably estimated again
Governance concerns
Heavy use of side pockets signals valuation problems. LPs will ask:
- Why are so many positions side-pocketed?
- How long have they been side-pocketed?
- What is the path to resolution?
Use side pockets sparingly and with clear documentation of why each position was side-pocketed and the expected path to resolution.
NAV vs. IRR
NAV tells you what the portfolio is marked at today. IRR tells you the time-weighted return over the investment period. They are related but different.
Why they diverge
| Factor | NAV Impact | IRR Impact |
|---|---|---|
| Unrealized gains | Increases NAV | Increases IRR only if gains persist |
| Cash distributions | Decreases NAV | May increase IRR (depends on timing) |
| Time | NAV is a snapshot | IRR reflects compounding over time |
| Timing of investments | No impact | Earlier investments have longer to compound |
Example: flat NAV, strong IRR
A fund has:
- $100M committed capital
- $95M called, $5M uncalled
- Current NAV of $100M (same as called capital)
- But $40M already distributed to LPs
NAV appears flat ($100M = $95M called), but the fund has returned 40% of capital while maintaining full principal. The IRR would be meaningfully positive.
What LPs should track
| Metric | What It Shows |
|---|---|
| NAV | Current marked value of fund |
| NAV per unit / share | Value of individual investment |
| Gross IRR | Return before fees |
| Net IRR | Return after fees |
| Multiple on invested capital (MOIC) | Total value / capital invested |
| DPI (distributions to paid-in) | How much cash has been returned |
| RVPI (residual value to paid-in) | How much is still unrealized |
A fund showing high NAV growth but low DPI may be relying on aggressive marks. LPs should look at the full picture.
Bid-ask spreads and what they signal
The bid-ask spread on ABF positions provides information about liquidity and valuation uncertainty.
Typical bid-ask spreads by asset class
| Asset Class | Typical Bid-Ask |
|---|---|
| Agency RMBS | 2-10 bps |
| Investment-grade auto ABS | 10-25 bps |
| Subprime auto ABS | 25-50 bps |
| Consumer loan ABS | 25-75 bps |
| Esoteric ABS | 50-150 bps |
| Private warehouse residuals | 100-300 bps |
| Distressed positions | 200-500+ bps |
Illustrative pricing. See pricing disclaimer.
What widening spreads tell you
A widening spread is a leading indicator of stress:
| Signal | Possible Causes |
|---|---|
| Spreads widen 25+ bps | General market stress, sector rotation |
| Spreads widen 50+ bps | Asset class concerns, credit deterioration |
| Spreads widen 100+ bps | Distress, forced selling, fundamental concerns |
| Dealer withdraws quote | No bid, market is frozen |
If your dealer was quoting 50 bps bid-ask and now quotes 150 bps, something has changed. Your marks should reflect the new reality.
Liquidity haircuts
Some valuation policies apply explicit liquidity haircuts to Level 3 positions. The logic: if you had to sell today, you would realize less than your model suggests.
Approaches to liquidity adjustment
| Approach | How It Works | Pros | Cons |
|---|---|---|---|
| Fixed haircut | Apply standard discount (2-5%) to all Level 3 | Simple, consistent | Blunt instrument |
| Tiered haircut | Larger discounts for less liquid positions | More precision | Requires judgment on tiers |
| Bid-side marking | Use bid, not mid, for positions with wide spreads | Market-based | Depends on having dealer quotes |
| Liquidation-adjusted | Model exit cost based on position size | Sophisticated | Complex to implement |
Tiered haircut example
| Position Type | Liquidity Haircut |
|---|---|
| Rated term ABS tranches | 1% |
| Unrated term tranches | 2% |
| Warehouse mezzanine | 3% |
| First-loss residuals | 5% |
Apply the haircut to the model-derived value before booking the mark.
Bid-side marking example
Your DCF model says a warehouse residual is worth $10.0M. Dealer color suggests:
- Bid: $9.5M
- Offer: $10.5M
- Mid: $10.0M (5% bid-ask spread)
Options:
| Approach | Mark | Rationale |
|---|---|---|
| Mark to mid | $10.0M | Theoretical fair value |
| Mark to bid | $9.5M | Conservative; reflects exit value |
| Mark between | $9.75M | Model-derived with liquidity adjustment |
For conservative reporting, the bid side or a mark between mid and bid is defensible.
Forced liquidation scenarios
In distressed scenarios, you may need to sell positions quickly. Understanding the difference between orderly exit and forced liquidation is important for risk management.
Orderly exit value
What you would realize with:
- 60-90 days to sell
- Proper BWIC process
- Normal market conditions
- Multiple bidders engaged
This is what your marks should generally reflect.
Forced liquidation value
What you would realize if you had to sell in 5-10 days regardless of market conditions:
- Single bidder may know you are desperate
- No time for competitive process
- Market may be stressed (margin calls often coincide with market stress)
Typical discount from orderly exit:
| Asset Type | Forced Liquidation Discount |
|---|---|
| Liquid term ABS senior | 5-10% |
| Term ABS mezzanine | 10-15% |
| Private ABS tranches | 15-25% |
| Warehouse residuals | 20-30% |
| Distressed positions | 30-50%+ |
When to model forced liquidation
Your marks should reflect orderly exit value. But you should model forced liquidation scenarios for:
| Purpose | Why It Matters |
|---|---|
| Risk management | Understanding tail risk |
| Leverage management | Margin call scenarios |
| Covenant compliance | What happens if you breach |
| LP stress testing | LP questions about downside |
Levered funds should have a clear understanding of what happens if they need to liquidate quickly. This is risk management, not valuation policy.
Reporting to LPs
LPs expect clear, consistent NAV reporting. Here is what good practice looks like:
Standard NAV report contents
| Section | Content |
|---|---|
| NAV summary | NAV, NAV per unit, period-over-period change |
| Portfolio composition | By asset class, rating, geography, or other relevant cut |
| Fair value hierarchy | Level 1, 2, 3 breakdown |
| Performance | Gross and net IRR, MOIC, DPI |
| Attribution | What drove NAV change (market moves, performance, new investments) |
| Leverage | Current leverage, headroom |
| Liquidity | Cash, available credit, upcoming maturities |
Transparency considerations
| Practice | Why It Helps |
|---|---|
| Show Level 3 methodology | LPs understand how you are marking illiquid positions |
| Explain significant mark changes | Builds trust; LPs are not surprised |
| Provide sensitivity analysis | Shows range of reasonable values |
| Disclose third-party valuation use | Signals governance |
| Compare to benchmarks | Context for performance |
LPs who understand your valuation process have more confidence in your marks, even when marks move against them.