Key Takeaways
- • Three investor advocates—including Mark Higgins of Enlightened Investor, along with Tim McGlinn and Leyla Kunimoto—have formally requested that the Financial Accounting Standards Board add secondaries valuation guidance to its technical agenda, citing concerns over artificially inflated performance reporting in private funds.
- • Current FASB guidance permits private managers to immediately write up the value of secondaries purchases on a single-day basis, enabling early performance recognition and NAV-based carry collection before underlying assets are actually sold—a practice advocates argue creates misaligned incentives and distorts reported returns.
- • The accounting treatment has become material as secondaries have grown from a niche strategy into a major fundraising driver for private equity, with large managers including Blue Owl, Blackstone, and Cliffwater increasingly relying on secondary funds and evergreen vehicles that require steady inflows to manage elevated redemption pressures.
- • Advocates contend the guidance was designed for less liquid markets and now inappropriately shapes capital allocation and risk across private assets; Mark Higgins stated the practice has "vastly accelerated inflows" into secondaries and that incentive misalignment is now "too material to ignore."
- • The issue highlights a structural tension in semi-liquid secondaries funds where managers earn performance fees on unrealized NAV gains, with a documented shift toward newer-vintage funds crystallizing carry earlier rather than waiting for actual asset realization—a practice older funds historically avoided.
Summary
Three investor advocates have formally petitioned the Financial Accounting Standards Board to reconsider accounting guidance that permits private fund managers to immediately revalue secondaries purchases, often within a single day of acquisition. The petition, led by Mark Higgins of Enlightened Investor alongside Tim McGlinn and Leyla Kunimoto, targets what advocates describe as a structural accounting practice that inflates reported fund performance and creates misaligned incentives between managers and investors.
The controversy centers on how secondaries—purchases of existing portfolio positions or fund stakes from other investors—are treated under current accounting rules. Rather than being marked to market over time, secondaries can be written up immediately at purchase, allowing managers to recognize performance gains before underlying assets generate actual economic returns. This early valuation recognition enables fund managers to accrue and collect performance fees on paper gains rather than waiting for realized exits, effectively front-loading carry collection. The practice has gained prominence as secondaries have evolved from a specialized corner of private markets into a significant fundraising engine, particularly for semi-liquid evergreen funds marketed to institutional and individual investors.
The timing of the petition reflects the maturation and scale of the secondaries market. As recently covered by Institutional Investor in 2024 and subsequently reported by the Wall Street Journal and Financial Times, the FASB guidance has accompanied explosive growth in secondary fundraising. Large managers including Blue Owl, Blackstone, and Cliffwater have deployed substantial secondaries capital, but several have recently faced elevated redemption requests, prompting some to impose withdrawal caps or pro-rata exits. Advocates contend that the accounting treatment creates perverse incentives: by enabling managers to demonstrate strong early performance through NAV appreciation alone, the guidance encourages capital inflows into vehicles that may not be delivering proportional economic value to investors. Higgins stated that the practice has "vastly accelerated inflows" into secondaries by creating "a distorted perception" of returns and that the issue has become material enough to warrant formal regulatory review.
The broader concern articulated by the advocates is that accounting rules designed for genuinely illiquid markets are now distorting capital allocation in semi-liquid structures where managers have flexibility to crystallize carry ahead of actual asset realizations. A documented trend shows newer-vintage secondaries funds increasingly collecting performance fees on unrealized gains, departing from older-fund practices where managers typically waited for cash proceeds. This shift underscores how accounting treatment directly shapes incentive structures and, by extension, the risk profile of capital flowing through private markets.
The controversy centers on how secondaries—purchases of existing portfolio positions or fund stakes from other investors—are treated under current accounting rules. Rather than being marked to market over time, secondaries can be written up immediately at purchase, allowing managers to recognize performance gains before underlying assets generate actual economic returns. This early valuation recognition enables fund managers to accrue and collect performance fees on paper gains rather than waiting for realized exits, effectively front-loading carry collection. The practice has gained prominence as secondaries have evolved from a specialized corner of private markets into a significant fundraising engine, particularly for semi-liquid evergreen funds marketed to institutional and individual investors.
The timing of the petition reflects the maturation and scale of the secondaries market. As recently covered by Institutional Investor in 2024 and subsequently reported by the Wall Street Journal and Financial Times, the FASB guidance has accompanied explosive growth in secondary fundraising. Large managers including Blue Owl, Blackstone, and Cliffwater have deployed substantial secondaries capital, but several have recently faced elevated redemption requests, prompting some to impose withdrawal caps or pro-rata exits. Advocates contend that the accounting treatment creates perverse incentives: by enabling managers to demonstrate strong early performance through NAV appreciation alone, the guidance encourages capital inflows into vehicles that may not be delivering proportional economic value to investors. Higgins stated that the practice has "vastly accelerated inflows" into secondaries by creating "a distorted perception" of returns and that the issue has become material enough to warrant formal regulatory review.
The broader concern articulated by the advocates is that accounting rules designed for genuinely illiquid markets are now distorting capital allocation in semi-liquid structures where managers have flexibility to crystallize carry ahead of actual asset realizations. A documented trend shows newer-vintage secondaries funds increasingly collecting performance fees on unrealized gains, departing from older-fund practices where managers typically waited for cash proceeds. This shift underscores how accounting treatment directly shapes incentive structures and, by extension, the risk profile of capital flowing through private markets.
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