On 5 March 2025, the FCA published the findings from its multi-firm review of valuation processes for private market assets. In this blog post, we look at the FCA’s findings and consider the implications for firms managing funds or providing portfolio management and/or advisory services in the UK for private equity, venture capital, private debt and infrastructure assets.
Why was this review conducted?
The UK continues to be the largest centre in Europe for private market asset management, providing a means of diversification of investments for investors and a source of long-term capital for corporates. However, the sector does not have the regular trading and price discovery of liquid public markets, so firms must rely on judgement-based assessments to produce asset valuation estimates. In the FCA’s view, this element of subjectivity creates the potential for inappropriate values being attributed to assets and therefore increased risk to investors and the market more broadly.
In September 2023, IOSCO issued a report on the emerging risks in private finance, highlighting a relative lack of transparency and consistency in approaches to valuations when compared to public markets. Furthermore, the Bank of England’s Financial Stability Report of June 2024 highlighted the potential for vulnerabilities in the private equity sector from opaque valuations.
The FCA is keen to ensure that robust valuation practices are being used to help promote fairness and confidence in this growing market, aligned to the FCA’s secondary objective of promoting international competitiveness and growth, and that this is particularly important due to the growing retail investor exposure to private assets.
The FCA carried out a two-part review consisting of a questionnaire sent to a sample of 36 firms holding about £3 trillion of global private assets under management (AUM) in aggregate, followed by an in-depth review of the governance and processes within a subset of those firms.
The FCA expects that once firms have considered the findings of this review, they should identity any gaps in the following (non-exhaustive) list of areas:
- The governance of their valuation process.
- Identifying, documenting, and addressing potential conflicts in their valuation process.
- Ensuring functional independence for their valuation process.
- Incorporating defined processes for ad hoc valuations.
What did the FCA find?
The FCA noted a number of positives from its review, including good practices in firms' valuation processes such as the quality of investor reporting and documentation of valuations, the use of third parties to increase independence and expertise, and the consistent application of established valuation methodologies. It also noted that firms generally recognised the need for robust processes and necessary investor protections.
There were, however, a number of areas where the FCA felt there was room for improvement and actions that firms should take, as set out below.
Governance arrangements
The FCA noted that nearly all firms had valuation committees, but in some cases there was poor record keeping in respect of how decisions were being made.
Actions for firms: Firms should make sure their governance arrangements ensure clear accountability for valuation and robust oversight of the valuation process, including accurate and detailed record-keeping of how valuation decisions are reached.
Conflicts of interest
The FCA said that all firms had identified potential conflicts of interest in their valuation process regarding fees and remuneration, and many had limited these conflicts through fee structures and remuneration policies. However, the following potential conflicts were in some cases only partly identified and documented:
- Investor fees – In some fund structures, there is a direct link between the net asset value (NAV) and management fees.
- Asset transfers – Some firms rely solely on in-house valuations, rather than seeking to verify these via third-party sources.
- Redemptions and subscriptions – Some open-ended funds offer periodic dealing or fundraising, with the price of redemptions and subscriptions based on the fund’s NAV, which may be valued on different dates.
- Investor marketing – Unrealised performance of current funds is often used in marketing for new funds, which could discourage managers from making necessary write-down of assets or reflecting price volatility.
- Secured borrowing – NAV financing arrangements often require a minimum level of diversification or a minimum loan-to-value (LTV) ratio, incentivising firms to inflate valuations to avoid breaching loan covenants.
- Uplifts and volatility – Investors often prefer an ‘uplift’ on exit, as well as stable valuations over time, which could incentivise firms to exaggerate the stability of valuations.
- Employee remuneration – Conflicts may arise where variable pay is linked to changes in NAV. Valuations may also have indirect links to remuneration, such as where firms offer profit-sharing schemes while managing vehicles charging fees using valuations or where valuations affect the perception of individual performance.
Actions for firms: Firms should consider if these valuation-related conflicts are relevant and, if so, document them and the actions to mitigate or manage them.
Functional independence and expertise
Some firms had insufficient expertise in their functions or had senior investment professionals representing all or the majority of valuation committee voting membership, which could compromise independent oversight and challenge.
Actions for firms: Firms should assess whether they have sufficient independence in their valuation functions and the voting membership of their valuation committees to enable and ensure effective control and expert challenge.
Policies, procedures and documentation
Not all firms’ valuation policies provided detail on the rationales for selecting methodologies and their limitations, nor the required inputs and data sources, and most firms did not include a description of the safeguards for the functionally independent performance of the valuation task nor the potential conflicts in the process. In some cases, the recorded rationales given for key assumption changes, such as adjustments in discount rates, were considered by the FCA to be vague.
Actions for firms: Firms should make sure their valuation policies are sufficiently comprehensive so that their valuation process is clear and adherence to it can be tested. Firms should consider whether they document valuation models consistently and clearly across assets, engage with auditors appropriately, and properly consider insights from backtesting to inform their valuation approach. Firms might also consider whether they can make investments in technology to improve consistency and reduce the risk of human error in their valuation process.
Frequency and ad hoc valuations
For most alternative assets, the industry has converged to quarterly valuation cycles, while debt assets also have monthly valuation cycles. However, most firms were unable to demonstrate clear policies or triggers for when an ad hoc valuation could be required.
Actions for firms: Firms should consider incorporating a defined process for ad hoc valuations to mitigate the risk of stale valuations. A defined process includes the thresholds and types of events that would trigger ad hoc valuations.
Transparency to investors
Approaches to reporting varied greatly across firms. Some firms said barriers limited their ability to share information with investors or that non-disclosure agreements prevented them from sharing data on portfolio company financials, while others noted the commercial sensitivity of sharing valuation models.
Actions for firms: Firms should consider where they can improve their reporting to and engagement with investors on valuations, including providing detail on fund-level and asset-level performance, to increase transparency and investors’ confidence in their valuation process. Good practice includes providing a ‘value bridge’ in reporting to investors showing the different components to changes in value of the NAV or assets.
Application of valuation methodologies
Although the FCA did not independently validate firms’ fair value assessments, it reviewed the consistency of the application of valuation methodologies and assumptions. It noted that firms sometimes had difficulty in identifying comparable companies or assets and also saw different approaches taken in some areas, such as reflecting market volatility.
Actions for firms: Firms should apply valuation methodologies and assumptions consistently and make valuation adjustments solely on the basis of fair value. Valuation committees and independent functions should focus on these adjustments to ensure they reach robust decisions. Where relevant, firms should consider using industry guidelines to ensure their approach is in line with standard market practice. Firms should also consider whether they should apply secondary methodologies to corroborate their judgement.
Use of third-party valuation advisers
Firms should consider the nature of their engagement with third-party valuation advisers and make sure investment professionals are kept at arms’ length to maintain independence. Firms also need to be mindful that independence may be limited if a service provider is dependent on the fees from their firm.
Actions for firms: Firms using third-party valuation advisers should ensure their use is appropriately overseen and that potential commercial conflicts are identified and managed. Firms should consider the strengths and limitations of the service provided and disclose the nature of the services used to investors, including portfolio coverage and frequency.
Next steps
The FCA will continue to engage with firms and industry bodies on the findings from this review. It notes that the size and make-up of the firms in this market varies greatly and so not all issues or recommendations will be applicable to every firm.
The FCA will also consider these findings as it reviews the assimilated law implementing the Alternative Investment Fund Managers Directive (AIFMD) and replaces it with rules in the FCA Handbook. The findings will also inform the FCA’s contribution to IOSCO’s review of the 2013 Principles for the Valuation of Collective Investment Schemes.
