On 5 March 2025, the FCA published its findings from its multi-firm assessment of governance and valuation practices within the private market sector (Review) along with a press release. The Review focused on firms operating in the UK that manage funds or offer portfolio management or advisory services for private equity, venture capital, private debt and infrastructure assets.
The Review included UK managers operating under the EU’s Markets in Financial Instruments Directive (MiFID) as implemented in the UK, alternative investment fund managers and investment advisors, but excluded UCITS (Undertakings for the Collective Investment in Transferable Securities) funds.
The Review will also be of broader interest to other stakeholders in the private markets sector, although the FCA’s scope here is limited to firms authorised by it, so there will be limited direct impact to managers located outside of the UK. That being said, the FCA’s findings are largely consistent with those of regulators in other jurisdictions and a number of the themes are consistent with approach taken by, for example, the US Securities and Exchange Commission to this topic.
This article provides a summary of the FCA’s Review findings, focusing on the FCA’s expectations for firms regarding valuation practices and highlighting specific good practices identified by the FCA.
Background
While the valuation of private market assets is underpinned by regulatory requirements and principles, and accounting standards, there is no consistent standard which applies to the various market participants across the private assets sectors, resulting in a divergence of standards and deployment of judgement-based strategies.
This also leaves scope for conflicts of interest, a lack of valuation transparency, inconsistency, and potential asset misvaluations. From a regulator’s perspective this poses a threat to market integrity and investor confidence. The FCA has emphasized that “robust valuation practices are important for fairness and confidence in private markets” and that a robust valuation process should demonstrate independence, expertise, transparency and consistency.
The Review was conducted in two phases:
- Phase 1: The FCA sent a questionnaire relating to private market activities and valuation practices to 36 firms.
- Phase 2: The responses from phase 1 were used to select a pool of firms for further examination. This involved a detailed review of the firms’ governance and valuation processes.
Overview of Findings
The FCA has observed that, in general, firms showed good practices in the following areas: investor reporting, documenting valuations, using third-party valuators and applying valuation methodologies consistently. However, the FCA also discovered the following areas for improvement: identification and documentation of conflicts of interest, independence of internal valuation processes, and consistency in relation to ad hoc valuations.
Breakdown of the FCA’s Findings
Governance Arrangements
The FCA has asked firms to consider whether they have governance arrangements in place that ensure strong oversight, clear accountability and thorough reporting on valuation decisions. The FCA found that most firms have some form of valuation committee that is responsible for valuation decisions or recommendations. Use of committees is thought to enhance independence and oversight capability over valuation processes. However, the Review revealed that meeting minutes often lacked detail on how decisions are reached. The FCA expects firms to have detailed records of the reasoning behind their valuation decisions.
Conflicts of Interest
The FCA expects firms to identify, document and assess potential valuation-related conflicts, their significance and the actions that have been taken to mitigate them. The Review identified the following conflicts as being potentially relevant in the private market valuation context:
Investor fees. Where the fees paid by investors (e.g. management fees) are linked to the value of the underlying asset, a conflict of interest could arise if the manager participates in the asset’s valuation. The FCA noted that firms should document this conflict and how it differs between product types.
Asset transfers. When a manager’s valuation sets the transfer price (for example, in the context of some continuation vehicles), and the manager is due to receive incentive compensation based on unrealized performance, there is a clear conflict of interest. The FCA expects managers to be impartial and perform valuations with due skill, care, and diligence. The Review showed that some firms mitigate this conflict by procuring a third-party valuation, creating separate teams or committees to represent client interests, and conducting market testing.
Redemptions and subscriptions. Some open-ended funds operating in the private markets sector price redemptions and subscriptions using the fund’s net asset value (NAV) whilst also only providing for periodic dealing; the Review found that this could create conflicts, particularly where there were gaps between valuation points and dealing days.
Investor marketing. A conflict could arise where firms use the unrealized performance of existing funds to attract fundraising for new vehicles, as firms may be motived to present consistent value increases over time. The FCA stated that good practice includes: documenting these conflicts, clearly breaking-up unrealized and realized investments in marketing materials, clearly indicating that the unrealized performance is based on the firm’s valuation methods, and detailing the elements of unrealized value.
Secured borrowing. NAV financing usually includes two key covenants: a minimum level of diversification covenant and a maximum loan-to-value ratio covenant. This could create a conflict where an increased valuation would increase the initial borrowing level, or circumvent a breach of a maximum loan-to-value ratio covenant. The Review highlighted that most firms did not identify or document this type of conflict.
Uplifts and volatility. When firms believe investors prefer a certain return profile (for example, showing stable asset performance), there is the potential for a conflict to arise in the valuation process for volatile assets or portfolios. The FCA noted that consistently applied valuation methodologies can instill confidence in investors, assuring them that their assets are being fairly valued (even if this results in less stable valuations).
Employee remuneration. A conflict can emerge where employee remuneration is linked to valuations, such as changes in NAV over a certain period or through profit-sharing schemes. The FCA noted that these conflicts can be managed by implementing procedures that ensure investment teams’ views are taken into account, but otherwise remain separate from any valuation decision. In addition, the FCA found that where remuneration was linked to portfolio performance, this was generally considered against realized gains, thereby removing valuation risk.
Functional Independence and Expertise
The FCA has stressed in its findings the importance of maintaining the independence of valuation committees and functions. In particular, the FCA found only a “few firms very clearly demonstrating functional independence”.
The FCA identified expertise as a key component of this independence, emphasizing that valuation committees and functions should possess sufficient valuation expertise to be able to issue independent judgement and provide robust challenges to valuation decisions.
The FCA highlighted the following examples of good practice for valuation committees and functions:
Independence and expertise. Some firms have adopted a separate function that is responsible for leading valuations, such as by preparing models and recommendations for valuation committee decisions. These functions should:
- be made up of individuals who are separate from portfolio management; and
- have enough valuation expertise to discuss: (i) the context and performance of assets; (ii) valuation challenges, (iii) valuation models; (iv) assumption changes; and (v) the reasoning behind their recommendations.
Voting members. The FCA expressed concerns around the involvement of senior investment professionals in the valuation process. Whilst acknowledging the importance of getting the right expertise, the FCA plans to follow up with firms that have senior investment professionals as voting members of their valuation committee to better understand how this is consistent with the independence of the valuation function.
Control. The FCA raised concerns where valuation functions had merely an administrative and operational role, with limited ability to control or challenge valuation inputs and assumptions. In these scenarios, the FCA found that investment professionals had more involvement in asset valuation (for example, inputting on comparable assets), which could impact the independence of the valuation process. To address this, the FCA suggested that firms should ensure there is greater oversight by valuation or risk committees to maintain independence, assess whether input and assumption variations are suitable, and identify and mitigate any conflicts of interest.
Detailed record keeping. Valuation committees should keep records of asset valuation discussions. These records should show a thorough comprehension of the asset, the valuation task and the need for uniformity in valuation approaches.
Policies Procedures and Documentation
The FCA expects firms to adopt clear, consistent and appropriate valuation policies, procedures and documentation. This will help ensure a uniform approach to valuations and enable investors and auditors to assess whether the valuation process is being correctly followed.
The FCA found that most firms did not have a good enough description of the safeguards for the functionally independent performance of the valuation committee. The FCA’s findings identify a number of good practices for firms to improve their valuation processes, including:
Valuation policies. Firms’ valuation policies should include:
- The aim of the valuation process to ensure assets are valued appropriately and fairly.
- The roles and responsibilities of each party involved in the valuation process.
- The governance arrangements.
- The frequency of valuation.
- The valuation methodology used (including the reasoning behind selecting the methodology, its limitations, and the necessary inputs and data sources).
- The investment strategy and accounting standards.
- The safeguards in place to ensure the independent execution of the valuation task.
- The potential conflicts of interest.
- The procedures for reviewing policies and procedures.
- Escalation measures.
- The necessity for consistency.
Use of templates. Firms should consider using valuation templates to guarantee a clear and consistent approach to valuations.
Flagging changes and providing context. Firms should highlight changes in inputs, assumptions and value, and provide qualitative information on the context and performance of the asset.
Keeping logs. Firms should maintain logs that show changes in assumptions between different assets.
Use of technology. Firms should consider investing in software that provides automated third-party valuations to increase consistency and mitigate the risk of human error.
The FCA also stated that it is good practice for firms to engage with auditors appropriately. The Review findings touch on how firms can support auditors in their assessment of valuation processes. Good practice examples include: allowing auditors to observe valuation committee meetings; addressing challenges raised by auditors during such meetings; and managing conflicts of interest involving the audit service provider, such as by changing audit partners and firms.
Furthermore, back-testing can provide firms with insight into the valuation of an asset under different market conditions. The FCA encourages firms to consider the results of back-testing in their approach to valuations.
Frequency and Ad Hoc Valuations
The FCA notes that infrequent valuation cycles can lead to stale valuations, meaning that an asset’s valuation no longer accurately reflects its current market value. This discrepancy can be detrimental to investors, particularly if investor fees, redemption prices, and subscription prices are based on stale valuations.
The FCA asserts that conducting ad hoc valuations, especially following material events that significantly alter market conditions or an asset’s performance, can help mitigate the risk of stale valuations. However, most firms did not have a formal process in place for conducting these. The FCA has encouraged firms to consider establishing a formal process for ad hoc valuations. The FCA’s findings show that these processes should clearly define the thresholds and types of events that would trigger an ad hoc valuation.
Such events may include notable movement in the average multiple of the comparable set, company specific events and fund-level triggers.
Transparency to Investors
The FCA urges firms to consider areas for improvement in their reporting and communication with investors in the context of valuations, with the goal of increasing transparency and confidence in valuation processes. The Review highlighted several best practices, including:
Comprehensive reporting. Firms should provide both quantitative and qualitative performance information at the fund and asset level.
Frequent communication. Firms should have regular calls with investors.
Inclusion of a “value bridge”. Reporting can be further enhanced by including a “value bridge”, which shows the various elements contributing to changes in asset values or net asset value. This helps investors understand the underlying causes of valuation changes.
Application of Valuation Methodologies
The FCA expects firms to apply established valuation methodologies (e.g., a market or income-based approach) and assumptions consistently. Adjustments should only be made based on fair value, and these adjustments should be scrutinized by valuation committees and independent functions to ensure robust decision-making. The FCA further encourages firms to review and consider other applicable industry guidelines, such as the International Private Equity and Venture Capital Valuation (IPEV) Guidelines, to ensure their valuation approach is aligned with market standards.
Additionally, the FCA’s findings noted that it is good practice for firms to apply a second established valuation methodology. This serves as a sense check to validate their primary valuation and confirm their judgement.
Use of Third-Party Valuation Advisors
The FCA highlighted that, especially in the context of internal conflicts of interest, it is good practice to seek further validation for internal valuations through a third-party valuation adviser. The FCA’s findings provided specific recommendations for firms when using a third-party valuation adviser, including the following:
Oversight and responsibility. Firms should oversee the valuation process and, ultimately, retain responsibility for the valuation decisions.
Independence of advisers. Firms should ensure the independence of the third-party valuation adviser. This includes keeping investment professionals at arms length to avoid any undue influence.
Consideration of limitations. Firms should consider the strengths and limitations of the valuation services provider.
Communication with investors. The type of third-party valuation services being used should be clearly communicated to investors, including details of portfolio coverage and frequency.
Management of commercial conflicts. Firms should mange any potential commercial conflicts, for example, where a third-party services provider is reliant on the fees charged to the firm.
Next Steps
The FCA has indicated that it intends to build on these findings further in due course and will consider them when reviewing the Alternative Investment Fund Managers Directive in the UK.
In the meantime, firms operating in the private market sector should review their valuation processes and governance arrangements in line with the FCA’s Review findings. Particular areas of focus should be:
- The independence of valuation committees, including the involvement of senior investment professionals on these committees.
- Making sure conflict frameworks are developed to capture the full suite of conflicts identified by the FCA and the frameworks are embedded into the firm.
- Developing more formal processes around ad hoc valuations.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.