Why Third-Party Valuations Are Inevitable (And How AI Can Help)
The private markets have a transparency problem, and regulators are starting to notice. Picture two private equity firms, both holding a position in the same company. One has marked that position at zero. The other has it marked at full value. They can’t both be right, and they probably both know it. This may sound like a thought experiment, but it isn’t. It’s a predictable outcome of how private markets are structured. When a portfolio company isn’t publicly traded, there’s no market price being set in real time to anchor the valuation. The firm holding the position has significant discretion over what number goes on the books, and when the economic incentives all point in one direction, that discretion tends to get used. No stock ticker to check, no public filing to cross-reference, no independent arbiter making sure the number reflects reality. It’s a system built on discretion, and people tend to use it in their favor.
A private equity fund’s ability to raise its next fund depends heavily on how well its current fund appears to be performing. If a portfolio company is struggling, marking it down doesn’t just look bad on paper. It can crater reported returns, spook existing limited partners, and make it significantly harder to bring in new capital. “If the one who had it marked at 100% actually marked it at the legitimate value, it would probably result in a $50 million hit in a $300 million fund,” says James McVeigh, CEO of Cyndx. “Which means they would essentially destroy all their returns and not be able to raise any more money.” The incentives just don’t point toward honesty.
This is why regulators, limited partners, and lenders are pushing hard for independent third-party valuations of private companies, and why that push is only going to get louder.
The Gap Between Public and Private Market Disclosure
In public markets, transparency is the baseline. If you want to know what a mutual fund’s holdings are worth, the math is straightforward. Shares trade constantly, prices are public, and you can calculate a fund’s value on any given day. Regulators can sleep soundly.
Private markets work differently. A private equity firm can tell its regulators and investors that its portfolio is worth whatever it decides. A firm can say the portfolio is worth X, and the regulators take note. Nobody independently verifies the numbers. That’s the system as it currently exists, and it’s looking increasingly shaky as private markets claim a bigger share of the global economy. There are fewer public companies than there were twenty years ago. These funds are bigger, deploying more capital, and carrying more systemic weight than ever. McVeigh doesn’t mince words about the risk. “The systemic risk is much, much higher today than it was in 2008, because increasingly the private markets are becoming a bigger and bigger part of the economy.”
That comparison to the 2008 downturn is worth sitting with. The financial crisis was built on mortgage-backed securities marked at values that bore little resemblance to reality, until they did and everything fell apart. The mechanism here is different, but the core problem is the same. Assets sitting on books at prices that serve the holder, not the market.
Who’s Asking for Change, and Why Now
The pressure is coming from three directions at once. Regulators are zeroing in on disclosure requirements for private funds. Limited partners (LPs), the pension funds, endowments, and family offices writing the big checks, are getting more aggressive about demanding to know where their positions are actually marked. And lenders are realizing they’re making credit decisions without a reliable independent picture of the companies they’re financing.
“The LPs are saying, ‘I need to know where this position is marked,’” McVeigh explains. “Some funds are becoming very aggressive where they’re saying, ‘I’m not going to give you any more money unless I get this data.’” When the people writing the checks start conditioning their capital on transparency, the conversation changes fast.
McVeigh sees three pillars driving this shift:
- regulatory disclosure requirements,
- investor demands for accountability,
- and the efficiency gains that come from having reliable valuations across lending and credit decisions.
The practical upside extends further than most people realize. Take any major credit rating service, which scores companies without any indication of their actual scale. A credit score tells you something, but it doesn’t tell you whether the company behind it is a $50 million business or a $500 million one. Add a third-party valuation to that picture, and the rating becomes a much more useful tool.
The Cost Barrier Is Disappearing
Until recently, the main argument against mandatory third-party valuations was cost. A traditional independent valuation from a reputable business valuation firm could run anywhere from $20,000 to $40,000 and take weeks to complete. For a private equity fund with dozens of portfolio companies, the costs can add up quickly. But that argument is now losing ground.
“Historically, it was done very manually,” McVeigh says. “Now, with new technologies, whether it’s Valer or any other tool, we can streamline that process, make it much cheaper, and allow you to provide those valuations on a daily basis at a very low cost. Literally pennies to them.”
Cyndx’s Valer is built for exactly this shift. It’s a valuation platform powered by artificial intelligence that produces investment-banker-grade reports, including DCF, VC method, public comparables, and precedent transactions, in minutes rather than weeks, at a fraction of the cost of a traditional engagement. And private equity firms facing mounting pressure from regulators and LPs to show their work should be reaping the benefits.
Beyond speed and cost, Valer analyzes market trends, financial metrics, and historical patterns to create professional-grade valuation reports, comparing a company’s financials against relevant market data, including comparable company multiples, expected returns for private and public companies, and long-term growth projections. The tool draws from Cyndx’s massive proprietary database of private and public company data, which means the comparables it surfaces reflect the actual market.
Transparency Won’t Kill Private Markets, but Grow Them
The private equity industry is expected to push back on mandatory third-party valuation requirements. But McVeigh thinks the resistance misreads what transparency actually produces. “With transparency, you tend to get increased volume and flow,” Cyndx’s CEO illustrates. “There should be an independent third-party valuation for each of these portfolios. And what will happen is they have to argue why their view differs from the independent one. That’s often going to be the case, and that’s fine. But having the ability to have a third party increases disclosure, which results in increased transparency, and ultimately results in increased investment.”
Think of it like an audit. Most companies seeking bank financing or private equity backing already get them, not because the law always requires it, but because no serious lender or investor will move forward without one. Nobody argues that audits are an unfair burden anymore. Third-party portfolio valuations are heading in the same direction, whether the industry gets comfortable with that or not. The regulatory logic is sound, LP pressure is building, and the technology to do it cheaply and credibly is already here. The only real question is how long the holdouts can hold out.
When you’re ready to stop waiting for that answer, let’s talk.