LIKE professional wrestling, private equity has a butch subculture that is hard to take entirely seriously. One of its defining characteristics is never, ever, to admit to a mistake in public. By convention, most buy-out bosses maintain that they anticipated a recession and acted cautiously. In reality, the buy-out industry had its biggest-ever binge just before the bust began. Most big firms paid silly prices for companies using sillier levels of debt. A reminder of just how reckless some deals were was provided on November 26th by BCE, a Canadian telecoms firm and the target of the second-largest buy-out bid on record. Its auditors judged that if the transaction went ahead the company would become technically insolvent.

As more companies owned by private-equity firms go bust, the industry will have to admit its sins. Until then executives can enjoy the latitude created by the valuation conventions that govern their portfolios. Accounting rules require that investments are held at “fair value”—the price at which they can be sold to a third party in an orderly transaction. Valiant efforts to interpret these rules are being made by the International Private Equity Valuations Board, an industry body that some buy-out firms support. But the calculations involve inevitably subjective comparisons with quoted companies. Conflicts of interest are possible: some buy-out firms' in-house dealmakers conduct valuations, which are reviewed by consultants and auditors and approved by senior executives.

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%. Yet Blackstone has said that its private-equity portfolio fell by just 13%. 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.

Private-equity firms maintain they bought defensive firms which are being run better than quoted peers are. But the limited price signals available also suggest low confidence in their valuations. The loans that funded the big deals typically trade at three-quarters of their face value, implying distress. The shares of the two Dutch-listed vehicles are worth less than 20% of their net asset values (see chart). Trading in all of these instruments is admittedly very illiquid, but the implication is hard to ignore.

However clear, does this message actually matter? It is hard to see why private-equity firms feel they need to be defensive about falling valuations. After all, they are paid if and when they sell companies for a profit, not on the basis of current marks. They lock in their clients' capital for many years and do not face the collateral calls and liquidity squeezes that make hedge funds so sensitive to calculations of net asset value.

The same cannot be said of the pension funds and endowments that invest in private equity. Even if they hold investments to maturity, they should care about their current value. And given the collapse of all asset classes (with the exception of private equity, of course) they are now being forced to reshuffle their entire portfolios. Using unrealistic values for their private-equity stakes pollutes this process. Many may choose to lower the absolute value of private-equity investments in their portfolios and concentrate their holdings on the best-performing funds. All of this requires accurate valuations. It is striking that so-called “secondary” sales by clients of stakes in buy-out funds are reputedly taking place at large discounts to their reported values, although again trading remains very thin.

In the end pressure for consistent and conservative valuations must come from clients. Still there are some signs that private-equity firms, behind the scenes, are preparing for a downturn far more severe than their valuations suggest. James Hickman, a private-equity specialist at Russell Reynolds, a headhunter, says that requests from buy-out firms to find operational managers have risen by 30-50%. Veterans with experience of recessions or of restructuring companies are in hot demand. As are, hopefully, straight talkers.