Valuation policy
Also called valuation procedures, valuation guidelines.
A valuation policy is the written document, adopted by the general partner and usually referenced in the LPA, that sets out how a fund determines the fair value of each investment at each reporting date: the methods used, the inputs and their hierarchy, who prepares and approves the marks, how often they are reviewed and how conflicts of interest are handled.
Example
A venture fund's policy says a priced round in the last twelve months sets the mark, adjusted for differences in rights between share classes; older marks are calibrated against a revenue multiple from comparable companies; public holdings take the closing price less a lock-up discount. The fund holds 1,000,000 Series A shares bought at $2.50. A Series B closed eight months ago at $4.00, and the policy's adjustment for the Series A's junior liquidation preference is 10%, so the mark is $3.60 a share: $3.6M against $2.5M of cost. A quarter later the company misses its plan badly; the policy's off-cycle review trigger fires, and the mark is held or cut with a written rationale either way.
Confused with
Fair value. The accounting standard, ASC 820 or IFRS 13, that defines what the number should represent. The valuation policy is how this fund applies the standard to its holdings.
NAV. The output. NAV is the sum of the marks plus cash less liabilities; the policy governs how the marks were reached.
In practice
The auditor tests marks against the policy, not against the auditor's own opinion of the company, so a vague policy makes for a longer audit. The conflict is structural: management fees after the investment period and accrued carry both move with the marks. LPs look for a valuation committee with someone outside the deal team, consistent marks across funds holding the same company, and a record of each quarter's decisions.