Financial Conduct Authority (FCA) Private Markets Valuation Review

The Financial Conduct Authority (FCA) conducted a multi-firm review of valuation practices for private market assets through a detailed questionnaire followed by in-depth interviews with a few selected firms. The review spanned several sectors including private equity, venture capital, private debt, and infrastructure. 

The review aimed to assess the robustness of firms’ valuation processes and governance, given the significant growth in private markets and the importance of accurate valuations for investor protection and market integrity. 

The outcome of the review has been long awaited since the initial indication that a review was in the offing nearly 18 months ago. The report can be accessed here. Some of the key findings of the report as well as recommended actions set out by the FCA included; 

1. Governance Arrangements: While most firms had valuation committees, some lacked detailed record-keeping of valuation decisions, potentially undermining demonstrable oversight.  

Action for firms; Firms should consider the effectiveness of their governance structures including ‘detailed records of how valuation decisions are reached’ should be maintained. 

2. Conflicts of Interest: Beyond commonly identified conflicts related to fees and remuneration, other potential conflicts—such as those arising from investor marketing, secured borrowing, asset transfers, redemptions, subscriptions, and valuation uplifts—were often only partially recognised and documented. 

Action for firms; There is an expectation that valuation related conflicts as well as the actions taken to mitigate these conflicts should be documented. 

3. Functional Independence and Expertise: The degree of independence in valuation processes varied. Some firms had dedicated valuation functions independent of portfolio management, while others had roles with limited control or ability to challenge inputs or assumptions. 

Action for firms; Firms should assess whether they have sufficient independence in their valuation function to ensure appropriate challenge of the judgements made during the valuation process. 

4. Policies, Procedures, and Documentation: Most firms had documented valuation policies, but not all provided detailed rationales for selecting methodologies or the required inputs and data sources or described safeguards for functional independence or the potential conflicts in the process. The use of valuation templates was encouraged to maintain consistency in the valuation approach. The importance of backtesting was also reiterated to allow valuers to benchmark their valuation approaches and promote a culture of continuous improvement in the process. 

Action for firms; The FCA expect firms to ensure their valuation policy policies are sufficiently comprehensive so that their valuation process is clear.

5. Frequency and Ad Hoc Valuations: Valuation frequency varied, with most firms conducting quarterly valuations. However, many lacked defined processes for ad hoc valuations (neither the process for performing the valuations nor the triggers that would require it) during significant market or asset-specific events, increasing the risk of out of date valuations.  

Action for firms; Firms should consider incorporating a defined process for ad hoc valuations to mitigate the risk of stale valuations. A defined process should include the thresholds and types of events that would trigger ad hoc valuations.

6. Transparency to Investors: Reporting practices varied, with some firms providing regular updates and others lacking in transparency. Enhanced transparency increases investor confidence. The use of a ‘value bridge’ showing different components of movements in NAV was seen as good practice.  

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. 

7. Application of Valuation Methodologies: Methodologies varied by asset class, with certain asset classes favouring the market approach and other asset classes using more income The use of an alternative valuation method was highlighted as best practice to serve as a sense check to the primary valuation methodology. Consistency in applying these methodologies is crucial.  

Actions for firms; The FCA expects firms to apply valuation methodologies and assumptions consistently and make valuation adjustments solely on the basis of fair value, which should be subject to valuation committee review. 

Firms should also consider whether they should apply secondary methodologies to corroborate the results of their primary methodology.

8. Use of Third-Party Valuation Advisers: Many firms engaged third-party advisers with a full valuation being the most common service type. Potential conflicts must be managed to ensure independence and the importance of assessing the quality of service and independence was also highlighted.  

Actions for firms; Where firms use third-party valuation advisers, their use should be appropriately overseen and potential commercial conflicts need to be identified and managed.

9. Third-Party Valuations and Valuation Committees: Many firms discussed their controls to assess the quality of service and independence provided by third-party valuation advisers. Examples included conducting an annual (or more regular) exercise whereby the firm used an external valuation specialist for the same asset and compared the valuations to the firm’s in house view, or where an external valuation specialist was used, the firm obtained a valuation from an alternative provider for the same asset and compared the quality of the valuation by both providers.  We also see (and regularly provide) independent valuations regularly being provided and then challenged by the valuation committees or AIFM who make the ultimate determination based on all the evidence provided to them.

Action for firms; Firms may wish to consider the use of third-party independent valuers and how such valuations are used in combination with own internal valuations; and how they are presented to relevant valuation committees.

Please do reach out if you would like to discuss any of the topics arising from the review or how to implement the findings of the review.