Private equity firms must value their portfolio at something representing fair value, but there's a lot of room for interpretation. That's where the International Private Equity Valuations Board, which provides standards, comes into play.

Unsurprisingly, the conventions have strained the credibility of some, notably the Economist. "Just how optimistic are these valuations? In the nine months to the end of September, developed-world shares dropped by about a quarter in dollar terms. Given their extra leverage, that is consistent with a fall in the value of companies owned by private equity of well over 50 percent. Yet Blackstone has said that its private-equity portfolio fell by just 13 percent. Two Dutch-listed vehicles run by Kohlberg Kravis Roberts and by Apollo, which have high exposures to boom-era deals, have both reported drops of about a quarter in their net assets." This isn't necessarily untrue. Some of these firms are recession-proof type companies. Of course, fair value only matters until the portfolio company goes belly up.

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