Unrealized gains are the increase in estimated value of investments a fund still holds. They represent the difference between a portfolio company’s current fair market value and the cost basis of the fund’s investment. Unlike realized gains, which come from actual exits, unrealized gains are paper profits that exist only in the fund’s quarterly valuations.
How Unrealized Gains Are Reported
Every quarter, general partners mark their portfolio to fair value following ASC 820 or IFRS 13 standards. If a fund invested $10 million in a company and the current fair value estimate is $25 million, the unrealized gain is $15 million. This gain is reflected in the fund’s net asset value and flows through to performance metrics like RVPI and TVPI.
The valuation methodology varies by asset type and stage:
- Buyout. Typically marked using enterprise value multiples (EV/EBITDA) based on public comparables or recent transaction comps.
- Venture capital. Often carried at the most recent financing round valuation, adjusted for material changes in the company’s trajectory.
- Growth equity. Usually a blend of revenue multiples from public comps and the last round pricing.
Fund administrators review these marks, and annual audits provide external validation. But the inherent subjectivity of private company valuation means unrealized gains are always estimates.
Unrealized Gains and Fund Performance
Unrealized gains are the gap between a fund’s TVPI and its DPI. A fund with 2.5x TVPI and 0.8x DPI has 1.7x of unrealized value for every dollar of contributed capital. That 1.7x is the sum of unrealized gains plus remaining invested cost basis.
For younger funds, heavy unrealized gains are expected. Investments need time to mature and reach exit readiness. For mature funds past year 7 or 8, a large proportion of unrealized gains raises questions about the GP’s ability to convert paper value into cash.
Why Unrealized Gains Require Scrutiny
The history of private markets is full of cases where large unrealized gains evaporated before exit. Public market downturns can compress valuation multiples. Company-specific problems can emerge. Exits may happen at discounts to the last mark. This is why experienced limited partners treat unrealized gains differently from realized gains.
Key questions to ask:
What is the GP’s realization track record? Compare exit proceeds to the last pre-exit NAV across prior funds. A GP that consistently exits at or above carrying value has earned more trust in their unrealized marks.
How concentrated are the unrealized gains? If one or two positions represent most of the unrealized value, the risk is higher than if gains are spread across many holdings. A single write-down in a concentrated portfolio can dramatically reduce TVPI.
Are the multiples used for marking defensible? If the GP is marking a SaaS company at 15x revenue when public comparables have compressed to 8x, the unrealized gain may be overstated.
Unrealized Gains and Fundraising
For GPs raising a subsequent fund, unrealized gains in the current portfolio are a double-edged sword. Strong markups support the narrative of a high-performing fund. But sophisticated LPs will discount unrealized gains and focus on DPI and realized gains as evidence of actual value creation. The most compelling track records show strong realized performance alongside a credible unrealized portfolio.
The bridge between unrealized and realized is execution: sourcing competitive exit processes, timing market windows, and building companies that buyers want. That ability is ultimately what separates paper gains from real returns.
Frequently Asked Questions
What is the difference between unrealized and realized gains?
Unrealized gains are paper profits on investments still held in the portfolio. They exist only on the fund's books based on current valuation estimates. Realized gains are actual profits locked in when an investment is sold or exited. Only realized gains produce cash distributions to LPs. Unrealized gains can increase, decrease, or disappear entirely before an exit occurs.
How are unrealized gains valued in private equity?
GPs mark unrealized holdings to fair value quarterly, typically using comparable company multiples, precedent transactions, or the most recent financing round. These marks are reviewed by fund administrators and audited annually. Because private markets lack daily pricing, unrealized gains are estimates that may differ materially from eventual exit values.
Should LPs be skeptical of large unrealized gains?
Healthy skepticism is warranted, particularly for funds in their early years or those with concentrated portfolios. LPs should examine the GP's historical realization rate: how do exit proceeds compare to the last reported NAV? A GP that consistently exits above carrying value is more credible than one whose markups frequently reverse.
