The UK Financial Conduct Authority (FCA) released the results of a review examining valuation practices in private markets.
This review responded to the global expansion of private markets, which offer limited transparency for investors.
The report assessed current practices and provided recommendations to improve the quality and reliability of reported valuations.
The FCA identified several issues across governance, valuation processes, and conflict management. Most firms had governance structures for valuations, often involving dedicated valuation committees.
However, the effectiveness of these committees varied, with some firms failing to maintain clear records for accountability.
The review found that independence within valuation committees and related functions is essential for reliable valuations.
Firms demonstrated different levels of independence, with some valuation functions subject to influence from portfolio management teams.
Valuation frequency differed by asset type. Private debt typically undergoes monthly or quarterly valuation, while private equity is assessed quarterly.
The FCA emphasized the need for regular valuations to avoid outdated assessments. It also highlighted that ad hoc valuations—performed outside scheduled intervals—help reduce risk during periods of significant market shifts.
The review uncovered potential conflicts of interest in valuation processes, particularly where valuations affected investor fees, asset transfers, or employee compensation. Although many firms recognized these risks, documentation and conflict management were often lacking.
The FCA conducted the review in two stages. First, it distributed a questionnaire to 36 firms. Second, it carried out document reviews and site visits, focusing on governance and valuation procedures.
The FCA made several recommendations:
- Firms should ensure that governance structures support accountability and oversight, with accurate records of valuation decisions.
- Firms should assess the independence of their valuation functions, ensuring valuation processes operate without influence from portfolio management.
- Firms should establish consistent valuation schedules and define clear criteria for conducting ad hoc valuations during periods of market volatility.
- Firms should identify potential conflicts in valuation processes, document them fully, and implement measures to manage these conflicts.
The FCA plans to monitor how firms implement these recommendations and address the identified shortcomings. It will also conduct a further multi-firm review focusing specifically on conflicts of interest in the management of private assets.
The FCA’s review underscores the need for transparent, independent, and accountable valuation practices in private markets.
As firms expand and raise new capital, effective valuation processes will help build trust and reduce risks in private asset investing.
