Skip to main content
PGIM LogoPGIM Logo
    • Megatrends
    • Annual Best Ideas
    • OutFront Series
    • Quarterly Market Outlooks
    • Vantage Point Series
    • Market Events
    • Thought Leadership
    • Events & Webinars
    • Video Library
    • Podcasts
    • Investing in Alternatives
    • Risk Management
    • ESG Investing
    • Opportunities in EM
  • Alternatives

    • PGIM Private Alternatives
    • PGIM Private Capital
    • PGIM Real Estate
    • Montana Capital Partners (PE)

    Equity & Fixed Income

    • PGIM Fixed Income
    • Jennison Associates

    Solutions

    • PGIM DC Solutions
    • PGIM Multi-Asset Solutions
    • PGIM Quantitative Solutions

    Intermediary Distribution

    • PGIM Investments
    • Clients We Serve
    • Defined Contribution
    • Financial Advisors
    • Institutional Relationships
    • Global Locations
    • Contact Us
    • Overview
    • Leadership
    • History
    • Our Businesses
    • Diversity, Equity & Inclusion
    • Global Locations
    • Contact Us
    • Subscribe
    • Request for Information
    • Careers at PGIM
    • Job Opportunities
    • All News
    • Press Releases
    • In the News
    • Facts & Figures
    • Media Contacts
abstract
Illiquid Private Assets

To Roll or Not to Roll (Forward): LP NAV Estimation for Private Equity and Real EstateToRollorNottoRoll(Forward):LPNAVEstimationforPrivateEquityandRealEstate

By Aili Chen — Nov 28, 2023

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL
  • Print
Download full research

Share

CIOs often grapple with obtaining timely net asset values (NAVs) of their private fund shares for reporting, risk management and rebalancing purposes. Many CIOs, as limited partners (LPs), rely on NAVs reported by their general partners (GPs).  Yet, timely GP-supplied NAVs can be elusive, prompting LPs to lean on their own estimates using the prior quarter's GP-supplied NAVs and recent financial data. 

Market volatility brings this issue to the fore. When public markets see a 20% dip, should LPs mark their NAVs down accordingly?  Such times prompt discussions on the accuracy and relevance of LP-estimated NAVs especially as different LPs may follow different valuation methods.

For a valuation method, some CIOs wait for the next GP report (which we label the “M1” approach) or adjust the prior GP-supplied NAVs for interim cash flows (“M2”).  CIOs may also employ a “roll forward” approach by adjusting prior GP-supplied NAVs for public market movements (“M3”). So, which approach has performed the best?

We give CIOs empirical data for each NAV estimation method by examining how well each approach matched historically the subsequently reported GP-supplied NAV. Our performance metric is the Mean Absolute Percentage Error (MAPE), the average absolute percentage difference between the LP-estimated and the GP-supplied NAV.  

Surprisingly, for private equity we find that, on average, rolling forward with the public markets (M3) and not rolling forward (M2) have exhibited similar accuracy on a quarterly basis. However, in down markets rolling forward has produced relatively larger quarterly estimation errors vs. not rolling. In contrast, in up-markets rolling has yielded better estimates.  We also examined how well each approach performed for small and large funds and by vintage age.

PE Average Absolute Quarterly Percentage Errors (MAPE), in %

(Vintages: 2000-2018, Market Proxy: S&P 500, Q1 2004 – Q3 2022)

Source: Burgiss, Datastream, PMA. As of 30 September 2022. For illustrative purposes only.

A MAPE of 6.09% means that, on average, the LP-estimated NAV deviates from the to-be-reported GP-supplied NAV by 6.09% of the GP-supplied NAV.  In a portfolio context, given, say, a 20% portfolio allocation to private equity, a 6.09% MAPE corresponds to an average absolute error of 1.2% of the total portfolio value. 

Rolling vs. not rolling involves tradeoffs.  While not rolling (M2) helps mitigate the overall volatility of a portfolio's value, rolling (M3) dampens the "denominator effect" whereby public market declines (increases) lead to increased (decreased) PE portfolio allocations. For some investors, this may lead to unnecessary portfolio rebalancing trades at inopportune times.

For CIOs who wish to follow a consistent LP estimation approach over time, we measured cumulative estimation errors over multiple quarters. On a multi-quarter basis, allowing positive errors in some quarters to offset negative errors in others, rolling forward has had consistently smaller cumulative errors and might be considered the better approach – at least from an estimation perspective. 

Mean Absolute Cumulative Percentage Error over n-Consecutive Quarters (M2 & M3), in %

(PE, Vintages: 2000-2018, Market Proxy: S&P 500)

Source: Burgiss, Datastream, PMA. As of 30 September 2022. For illustrative purposes only.

In contrast to private equity funds, rolling forward for private real estate funds performed significantly worse on a quarterly basis – in both up and down markets – compared to not rolling. We suspect this is mainly driven by the intrinsic differences in the valuation process between the two asset classes.  While private real estate valuations may hinge more on transactions – largely absent during stressed markets – private equity can always lean on the readily-observable public equity market.

RE Average Absolute Quarterly Percentage Errors (MAPE), in %

(Vintages: 2000-2018, Market Proxy: NAREIT, Q1 2004 – Q3 2022)

Source: Burgiss, Datastream, PMA. As of 30 September 2022. For illustrative purposes only.

Recently, public markets have been volatile while private markets much less so.  We evaluate the recent relative performance of the three valuation methods using data from Q1 2018 to Q2 2023.  The recent period’s results mirror the patterns observed for our extended study.

PE Average Absolute Quarterly Percentage Errors (MAPE), in %, Recent Years

(Vintages: 2006-2018, Market Proxy: S&P 500, Q1 2018 – Q2 2023)

Source: Burgiss, Datastream, PMA. As of 30 September 2022. For illustrative purposes only.

RE Average Absolute Quarterly Percentage Errors (MAPE), in %, Recent Years

(Vintages: 2006-2018, Market Proxy: NAREIT, Q1 2018 – Q2 2023)

Source: Burgiss, Datastream, PMA. As of 30 September 2022. For illustrative purposes only.

For a CIO, the right approach may rest on the asset type, market environment, fund characteristics and investment goals.  While many factors are at play, our results may help support the CIO’s decision.

Download full research
Learn More
Portfolio Research

The Portfolio Research team conducts proprietary research, helping investors navigate asset allocation, portfolio construction, and evolving market landscapes.

Learn More

  • By Aili ChenVice President, PGIM Multi-Asset Solutions

You may also like

Slower Private Asset Distributions: What Does It Mean for a CIO?
Illiquid Private Assets

Slower Private Asset Distributions: What Does It Mean for a CIO?

Jan 15, 2025

Since 2022, private asset distributions have weakened. Understand how this impacts CIO’s commitment pacing, liquidity risk and asset allocations.

Collective Defined Contribution (CDC) Schemes: Assessing Capacity for Alternative Investments
Illiquid Private Assets

Collective Defined Contribution (CDC) Schemes: Assessing Capacity for Alternative Investments

Jul 31, 2024

There is growing interest in collective defined contribution schemes as pension systems adapt to changing economics and demographics.

Uncovering the Unobservable: Have Private Assets Outperformed Public Assets?
Portfolio Research

Uncovering the Unobservable: Have Private Assets Outperformed Public Assets?

Jul 14, 2024

IAS's Fair Comparison framework uncovers the real-world performance of private assets, comparing private and public assets on a consistent risk-adjusted basis.

  • Insights

    • Megatrends
    • Annual Best Ideas
    • OutFront Series
    • Quarterly Market Outlooks
    • Market Events
    • Thought Leadership
    • Events & Webinars
    • Video Library
    • Podcasts
  • Investment Themes

    • ESG Investing
    • Investing in Alternatives
    • Investing in Emerging Markets
    • Risk Management
  • Our Businesses

    • PGIM DC Solutions
    • PGIM Fixed Income
    • PGIM Investments
    • PGIM Multi-Asset Solutions
    • PGIM Private Alternatives
    • PGIM Private Capital
    • PGIM Real Estate
    • Montana Capital Partners (PE)
    • PGIM Quantitative Solutions
    • Jennison Associates
  • Clients

    • Clients We Serve
    • Defined Contribution
    • Financial Advisors
    • Institutional Relationships
  • About

    • Overview
    • Leadership
    • History
    • Diversity, Equity & Inclusion
    • Global Locations
    • Contact Us
    • Subscribe
    • Request for Information
  • Careers

    • Careers at PGIM
    • Job Opportunities
  • Newsroom

    • All News
    • Press Releases
    • In The News
    • Facts & Figures
    • Media Contacts
PGIM Logo
  • Terms & Conditions
  • Privacy Center
  • Accessibility Help
  • UK Regulatory Disclosures
  • Netherlands Regulatory Disclosures
  • Canadian Regulatory Disclosures
  • Ireland Gender Pay Gap Report
  • Cookie Preference Center

For Professional Investors only.* All investments involve risk, including the possible loss of capital.

This material is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM is the principal asset management business of Prudential Financial, Inc. and a trading name of PGIM, Inc. and its global subsidiaries. PGIM, Inc. is a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). Registration with the SEC does not imply a certain level of skill or training.

The information on this website is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In making the information available on this website, PGIM, Inc. and its affiliates are not acting as your fiduciary.    

In the United Kingdom, this website may be issued by PGIM Private Alternatives (UK) Limited or PGIM Private Capital Limited.  In the European Economic Area (“EEA”), this website may be issued by PGIM Private Capital (Ireland) Limited or PGIM Luxembourg S.A. or PGIM Real Estate Germany AG.

PGIM, Inc. has its headquarters at 655 Broad Street, Newark, NJ 07102. PGIM Private Capital (Ireland) Limited has its registered office at IDA Business Park, Letterkenny, Co. Donegal, F92 FP83, Ireland. PGIM Private Capital (Ireland) Limited is authorised and regulated by the Central Bank of Ireland and registered in Ireland under company number 635793 operating on the basis of a European passport. PGIM Limited and PGIM Private Alternatives (UK) Limited have their registered offices at Grand Buildings, 1-3 Strand, Trafalgar Square, London WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number: 193418). PGIM Private Alternatives (UK) Limited is authorised and regulated by the FCA of the United Kingdom (Firm Reference Number: 181389). PGIM Private Capital Limited has its registered address at 1 London Bridge, London SE1 9BG and is authorised and regulated by the FCA of the United Kingdom (Firm Reference Number: 172071). PGIM Luxembourg S.A., Netherlands Branch is registered with the Netherlands Chamber of Commerce under number 85998877 and has its local offices at Gustav Mahlerlaan 1212, 1088LA Amsterdam, The Netherlands. PGIM Luxembourg S.A. has its registered address at 2 Boulevard de la Foire, L-1528 Luxembourg and is authorised and regulated by the Commission de Surveillance du Secteur Financier (“CSSF”) in Luxembourg (registration number A00001218). PGIM Real Estate Germany AG has its registered address at Wittelsbacher Platz 1, 80333 Munchen, Germany and is authorised and regulated by Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”) in Germany (registration number 10138142).

In Japan, information is provided by PGIM Japan Co., Ltd. (“PGIM Japan”) and/or PGIM Real Estate (Japan) Ltd. (“PGIMREJ”).  PGIM Japan, a registered Financial Instruments Business Operator with the Financial Services Agency of Japan offers various investment management services in Japan.  PGIMREJ is a Japanese real estate asset manager that is registered with the Kanto Local Finance Bureau of Japan.

In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 of the Securities and Futures Ordinance (Cap. 571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a regulated entity with the Monetary Authority of Singapore under a Capital Markets Services License to conduct fund management and an exempt financial adviser. This material is issued by PGIM Singapore for the general information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act 2001 of Singapore (the “SFA”) and “accredited investors” and other relevant persons in accordance with the conditions specified in Section 305 of the SFA. In South Korea, information is issued by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors on a cross-border basis.   

Prudential Financial, Inc. (“PFI”) of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. 

*PGIM.com/Podcasts and its content is intended for informational or educational purposes only and is not directed exclusively to Professional Investors. 

PGIM Logo
PGIM Logo

You are viewing this page in preview mode.

Edit Page