FCA Finds Private Market Valuation Controls Need Improvement

What's New

According to the Financial Conduct Authority's recent multi-firm review of private market valuation practices, while many firms demonstrate good practices, significant gaps remain in conflict management, independence, and handling of ad hoc valuations during market disruptions.

Why It Matters

With private markets growing significantly as an important source of diversification and returns for investors, robust valuation practices are critical for maintaining investor confidence and market integrity, especially given the absence of frequent trading and regular price discovery present in public markets.

Key Findings

• Conflicts remain partly identified and managed, with many firms failing to document key conflict areas like investor marketing, secured borrowing, and asset transfers.

• Independence varies widely, with some firms lacking sufficient separation between investment teams and valuation functions.

• Governance arrangements show inconsistency, with some valuation committees failing to maintain detailed records of decision-making processes.

• Transparency levels differ substantially across firms, with leading organizations providing comprehensive "value bridge" reporting that breaks down valuation components.

• Methodology application varies by asset class, with market approaches dominating private equity and venture capital, while income approaches prevail in infrastructure.

Key Quotes

• "Robust valuation processes were those that could evidence independence, expertise, transparency and consistency."

• "While all firms identified conflicts in their valuation process around fees and remuneration... other potential conflicts were only partly identified and documented."

• "Many firms did not have defined processes or a consistent approach for ad hoc valuations to revalue assets during market or asset-specific events."

• "We expect firms to assess whether they have sufficient independence in their valuation functions and the voting membership of their valuation committees."

By The Numbers

• £3 trillion in global private assets under management covered in the FCA review

• £1 trillion in UK private AUM examined across various asset classes

• 90% of firms maintain valuation committees, though effectiveness varies

• 70% of firms reported adhering to International Private Equity and Venture Capital Valuation Guidelines

• Only a minority of firms have defined quantitative or qualitative thresholds for triggering ad hoc valuations

Key Trends to Watch

• Firms are increasingly implementing technology solutions to improve consistency and reduce the risk of human error in their valuation processes.

• Third-party valuation advisers are becoming more common as an additional control to provide independence and expertise, particularly for complex assets.

• The FCA will conduct targeted follow-up work with outlier firms identified during the review.

• Regulatory frameworks will evolve as the FCA reviews AIFMD-implemented law with an eye toward making requirements more proportionate and tailored to UK markets.

The Wrap

Asset managers must urgently assess their valuation governance frameworks, particularly around conflicts management, independence, and ad hoc valuation processes, while regulators globally coordinate to establish consistent standards that maintain investor confidence without hampering growth in private markets.