FCA Multi-Firm Review on Private Market Valuation Practices

What's new?

On 5 March 2025, the FCA published its findings from a multi-firm assessment of valuation practices and governance for valuing private markets assets.

The review will be relevant to asset managers, alternative investment fund managers, investment and portfolio managers, and investment advisers.

The findings emphasise the importance of robust valuation practices in private markets, which lack the frequent trading and regular price discovery present in more liquid, public markets. The review includes the FCA's expectations from firms in this area, along with examples of good and bad practice that it has seen.

The FCA also lists several actions that it expects firms to take in light of the review (see the section Next steps below).

What does the FCA's review say?

Conflicts of Interest

The review identified several conflicts of interest in the valuation process, including:

• Investor Fees: Conflicts may arise when investor fees are linked to valuations. The FCA observes that good practice includes fund structures that inherently limit such conflicts. For instance, closed-ended limited partnerships that charge management fees based on committed capital, or the amount of initial capital invested capital, and calculate carried interest on realised performance.

• Asset Transfer: Conflicts may arise in the valuation process when assets are transferred using the manager's valuation as this determines the transfer price and can affect the interests of buyers, sellers, and remaining investors.

• Redemptions and Subscriptions: Open-ended funds investing in private assets may face conflicts when using the fund's NAV to price redemptions and subscriptions. This may cause potential harm and conflicts among new, exiting, and remaining investors as transactions might occur at prices that do not accurately reflect the true value of the fund's investments.

• Investor Marketing: Firms may have an incentive to show positive movements in value over time when using the unrealised performance of existing funds to support fundraising for new vehicles.

• Secured Borrowing: Depending on how the borrower values their unrealised investments, the NAV could be inflated to attract a greater amount of initial borrowing or avoid breaching a loan-to-value (LTV) covenant.

• Uplifts and Volatility: A potential conflict arises when firms take into account investor preferences for stable valuations or uplifts upon exit.

• Employee Remuneration: Where remuneration is linked to valuations, conflicts can arise. However, most firms have taken steps to mitigate this conflict by seeking additional assurance for in-house valuations. This typically involves obtaining additional independence and expertise by engaging a third-party valuation adviser.

Policies, procedures and documentation

Clear and consistent policies, procedures and documentation are core components of a robust valuation process. The FCA expects firms to consider the following examples of good practice:

• Functional independence and expertise: Independence is a key component of a robust valuation system. Firms that clearly demonstrated functional independence maintained a dedicated function or existing control function to lead valuations, develop models, and prepare recommendations for decisions made by valuation committees.

• Governance arrangements: Ensure there is clear accountability for valuation and robust oversight of the valuation process, including accurate and detailed record-keeping of how valuation decisions are reached.

• Auditors: Facilitate the role of external auditors by involving them in the valuation process. This can include inviting auditors to attend valuation committee meetings, addressing auditor challenges during these meetings, and proactively managing conflicts of interest by rotating audit partners and firms.

• Backtesting: Using the results of backtesting to refine the approach their approach to valuations. This involves identifying insights about current market conditions and recognising potential limitations in models, assumptions and inputs.

• Investor marketing: Ensure a clear distinction between unrealised and realised investments in marketing materials, making clear that unrealised performance was based on the firm's approach to valuations, and presenting the components of unrealised value.

• Transparency:  Most firms demonstrated good practice by reporting both quantitative and qualitative information on performance at the fund and asset levels, and by holding regular conference calls with investors. Some firms further enhanced their reporting by including a 'value bridge' to illustrate the various components contributing to changes in the NAV or asset values.

Next Steps

The FCA has listed several actions that it expects firms to take:

• Governance arrangements: Ensure clear accountability for valuation and robust oversight with accurate and detailed record-keeping of how valuation decisions are reached.

• Ad hoc valuations: Incorporate a defined process for conducting ad hoc valuations to mitigate the risk of relying on stale valuations. A defined process includes the thresholds and types of events that would trigger ad hoc valuations.

• Consistent valuation methodologies: Apply valuation methodologies and assumptions consistently, making adjustments solely based on fair value. Firms should also consider using secondary methodologies to corroborate their judgement.

• Third-party valuation advisers: Ensure appropriate oversight and manage any potential commercial conflicts when engaging third-party valuation advisers. Firms should evaluate the strengths and limitations of the services provided and disclose the nature of these services to investors, including details on portfolio coverage and frequency.

• Independence in valuation functions: Assess whether there is sufficient independence within their valuation functions and the voting membership of their valuation committees to ensure effective control and expert challenge.

• Backtesting: Ensure valuation policies are clear and comprehensive for effective testing. Firms should consistently document valuation models across all assets, engage with auditors, and utilise insights from backtesting to refine their valuation approach. Additionally, firms should consider investing in technology to enhance consistency and minimise the risk of human error in their valuation processes.

These findings will inform the FCA's review of the Alternative Investment Fund Managers Directive (AIFMD) as it updates its rules in the Handbook.

In addition, it will also contribute to the FCA's input in IOSCO's review of global valuation standards, aiming to support the adoption of proportionate and consistent valuation standards globally in private markets.