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How to Value Illiquid Assets for Net Worth

Valuation of illiquid assets

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How to Value Illiquid Assets for Net Worth

Users typically value illiquid assets at zero until they are converted to cash or marketable stock. Others suggest applying a heavy discount to the latest available pricing or using the cost basis until there is evidence of a change in value.

For specific assets like startup equity or private equity carry, the common advice is to assign a zero value for net worth and budgeting until a liquidity event occurs. Real estate investments require calculating annual returns after all costs, including maintenance and taxes, to compare against opportunity costs.

Professional methods include discounted cash flow analysis, where future cash flows are estimated and discounted with a risk-adjusted rate. Another common approach is adding a spread to the risk-free rate, which can be adjusted based on public indices or expert judgment for creditworthiness and liquidity.

Valuation methods

  1. Zero valuation Assign a value of zero until you have cash or marketable stock in hand.
  2. Discounted value Apply a heavy discount, such as a 20% haircut on the latest market price if a liquidity event is near.
  3. Cost basis Value the asset at its original cost until there is evidence of a different value.
  4. Discounted cash flow Estimate future cash flows and discount them with a risk-adjusted rate to account for the time value of money.
  5. Risk-free rate plus spread Add a spread to the risk-free rate, adjusting for creditworthiness and liquidity using public indices or expert judgment.
How to Value Illiquid Assets for Net Worth — infographic

General Approaches to Valuation

Zero Valuation: Many Users recommend assigning a zero value to illiquid assets for personal net worth calculations until the asset is liquidated. "I would mark it to $0 until you have cash or marketable stock in hand."
Discounted Value: Some Users suggest using a heavily discounted value based on the latest available pricing, especially for assets like private company shares. "If there is a liquidity event on the horizon, then 20% haircut on the latest market price."
Cost Basis: For assets like LP shares in venture funds, valuing them at their cost basis until there is evidence otherwise is a common strategy. "For VC funds, I think I’d consider them to be approx equal to cost basis until I had evidence otherwise."

Specific Illiquid Asset Types

Startup Equity/Options: Users frequently advise valuing startup equity and options at zero until a liquidity event occurs due to high uncertainty. "Equity at a pre-IPO company is zero dollars. Consider a liquidity event a bonus, not a guarantee."
Real Estate: For investment properties, Users suggest calculating annual returns after all costs, including maintenance and taxes, and comparing this to opportunity costs. "You need to calculate your annual return after all costs, including maintenance and taxes."
Carry Compensation: For carry compensation in private equity, Users generally recommend ignoring it for budgeting and net worth until it is realized. "My approach has been to ignore it from a spending / savings perspective."

Professional and Insurer Methods

Discounted Cash Flow (DCF): Insurers commonly use DCF analysis, estimating future cash flows and discounting them with a risk-adjusted rate, sometimes incorporating additional models for credit risk and illiquidity premiums. "One approach is to use discounted cash flow (DCF) analysis... This method takes into account the time value of money and accounts for changes in interest rates."
Risk-Free Rate + Spread: A common method involves adding a spread to the risk-free rate, which can be adjusted based on public indices or expert judgment for creditworthiness and liquidity. "I'd say it's most commonly done as you suggest on a risk free + spread basis."

Are you looking for methods to value a specific type of illiquid asset?

Bottom line

When valuing illiquid assets, Users often consider them as zero until they are converted to cash or marketable stock, with others suggesting discounts based on factors like the latest funding rounds or expert judgment.

Related questions

How do you value startup equity before an IPO?
Users advise valuing startup equity and options at zero until a liquidity event occurs due to high uncertainty. You should consider a liquidity event a bonus rather than a guarantee.
Should I include private equity carry in my net worth?
Users generally recommend ignoring carry compensation for budgeting and net worth calculations until it is realized.
What is the zero valuation method for illiquid assets?
The zero valuation method involves assigning a zero value to illiquid assets for personal net worth calculations until the asset is liquidated into cash or marketable stock.
How do insurers value illiquid assets?
Insurers commonly use discounted cash flow analysis, estimating future cash flows and discounting them with a risk-adjusted rate. They may also incorporate additional models for credit risk and illiquidity premiums.
How do you value venture fund LP shares?
A common strategy for LP shares in venture funds is to value them at their cost basis until there is evidence otherwise.

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