Investors are growing increasingly uneasy about the valuation of private-equity holdings, with concerns mounting that firms have been marking up their portfolio companies at unrealistic levels. The disconnect between stated net asset values and what buyers are willing to pay in secondary markets has become impossible to ignore.

Industry participants acknowledge the problem is widespread. Fund stakes routinely trade on secondary markets at steep discounts to their reported NAVs. Last year marked a turning point: for the first time in the industry's recent history, private-equity firms on average exited investments below their estimated values — a clear signal that previous marks were inflated.

The Securities and Exchange Commission is now stepping in, forming a new enforcement group focused on audit firm misconduct. But regulators are short-staffed, and observers question whether they have the resources to thoroughly police an industry that has long operated with minimal scrutiny. The secondary market discounts suggest the industry may need to reset valuations downward significantly to restore investor confidence.