Three investor advocates are asking the Financial Accounting Standards Board to reconsider guidance that allows private managers to write up the value of the secondaries they purchase, a practice they say may artificially boost reported returns.
“When funds buy secondaries — mark them up in a lot of cases in a single day — it creates a distorted perception,” said Mark Higgins, founder of Enlightened Investor, one of three people asking the FASB to put the issue on its technical agenda this year.
The little-talked about FASB guidance, which Institutional Investor first wrote about in 2024 and has since been covered by the Wall Street Journal and the Financial Times, has accompanied the growth of secondary funds, which have been booming in recent years. Once a niche corner of private markets, secondaries have grown into a major source of fundraising momentum in private equity and have become a larger part of evergreen funds that offer periodic liquidity and are marketed to individual investors. Several of the largest vehicles, including funds run by Blue Owl, Blackstone, and Cliffwater — have faced elevated redemption requests in recent months, leading some managers to impose caps on withdrawals or prorate exits.
Because secondaries can be revalued immediately under current rules, the accounting treatment can lift reported performance early — making them attractive tools for evergreen funds that need steady inflows and investor confidence to manage redemptions.
“There has been a multi-decade flood of capital into private equity, private credit,” Higgins said, claiming that the accounting treatment “vastly accelerated the inflows” into secondaries. He added that misaligned incentives raise concerns that an accounting rule designed for less liquid markets is now shaping capital flows and risk across private assets.
And now, he said, “It’s just getting too material to ignore.”
In an April 2 letter to FASB, Higgins along with Timothy McGlinn, the founder of AltView, and Leyla Kunimoto, the founder of Accredited Investor Insights, requested that FASB “consider adding a project to its technical agenda to evaluate the continued appropriateness of the use of net asset value (NAV) as a practical expedient by investment funds pursuant to Topic 820,” referring to the guidance.
The way it works now is that secondary funds buy stakes in private equity or private credit at discounted prices and are allowed to immediately mark them up to the NAV that the general partner uses to value its fund’s assets.
The letter’s writers pointed out that markets have evolved since the guidance was first issued, when “secondary market participants were typically limited in number, and transactions were relatively infrequent. As a result, observable pricing data was not consistently available to inform fair value measurements.”
But now “secondary transactions in private fund interests have increased substantially in both volume and frequency, and many transactions now involve multiple market participants,” they said. While the guidance assumed that NAV is a “reasonable estimate of exit price,” the secondary transactions whose prices are “materially different” from NAV mean continued reliance on this guidance is “difficult to reconcile” with the objective of FASB’s guidance.
Higgins explained how the accounting guidance plays into the overall business of secondaries. “You launch a fund, you buy these assets in the secondary market, mark them up to NAV, and report returns, and then that pulls in more money,” he said. But the only way to sustain those returns, he said, is for funds that are generating most of their returns from this accounting treatment to continue buying.
“They are incentivized to buy more discounted assets they can write up to keep the performance up,” he said. “As you get bigger and bigger, it's harder to sustain because you have to buy more and more to get those markups.”
“It’s like putting rocket fuel on the growth of these funds. And it's all built on the assumption that those markups are real, and if they're not, they have a big problem,” he said.
The problem is particularly acute in evergreen funds, which have skyrocketed in recent years, according to the letter’s authors. Assets have increased from $200 billion in 2020, to approximately $700 billion in 2024.
Higgins, who has written a book on U.S. financial history, “Investing in U.S. Financial History: Understanding the Past to Forecast the Future,” has studied financial crises and found that a number of small steps by independent actors unaware of how they fit into the whole can eventually culminate in a crisis — something he sees at work in private markets. In the case of private assets, he said, it starts with the allocators, and then the consultants “which have an incentive to push this stuff. It works its way through the supply chain, and by the time it pops out the end, it is really dangerous stuff.”
He considers the accounting treatment one of the steps that are leading to dangerous results. The end of this supply chain, as he sees it is, are the individual investors in evergreen funds. He pointed out that a number of secondaries are in evergreen funds that are marketed to individual investors. Because those funds offer a “liquidity promise” that can be difficult to fulfill during periods of stress, they can become vulnerable to a run, as has happened in the business development company market recently.
“People who have studied financial history know that if you structure something that's vulnerable to a run without a lender of last resort, it's almost inevitable that you're going to have a run eventually,” he said.
In a statement to II, a FASB spokesperson said “we appreciate the commenters taking the time to submit the agenda request and, as with all agenda requests, the FASB will discuss the letter at a future meeting.”
