PE funds routinely mark-up investments on day one. According to the Wall Street Journal, StepStone Private Markets recorded a 15% gain on 34 investments purchased the same day, using subjective NAVs from other fund managers rather than observable market prices. According to Forbes, the zombie backlog – 31,000 companies, 5.6-year average hold periods, 3:1 investment-to-exit ratio – exists because fund managers face no penalty for overvaluing assets and every incentive to avoid recognition of losses that would trigger LP revolt and regulatory scrutiny.
Ironically, regulators and LPs are taking notice. Congresswoman Elise Stefanik’s June 2025 letter to SEC Chairman Atkins called out illiquid PE holdings as “often overvalued due to reliance on internal estimates and outdated transaction data.” Further, the SEC’s chief accountant has warned accounting firms about conflicts from PE investments. As of the end of 2025, more than half of the top 30 U.S. accounting firms have sold stakes to private equity, up from zero in 2020. PE firms now own the auditors who verify PE fund valuations. But regulatory pressure won’t fix underwater portfolio companies – operational value creation will. The PE firms that survive this reckoning will be the ones delivering measurable EBITDA improvement, cash flow stabilization, and financials that withstand third-party scrutiny.