The review found areas of existing good practice and identified where managers need to improve governance and valuation rigour. The FCA indicated they “expect firms to consider the findings from this review and identify any gaps in their approach”.
We recommend that private capital managers review whether their valuation policy and associated governance need to be strengthened in light of the FCA findings. An effective valuation policy helps mitigate conflicts of interest and benefits investors through the provision of more timely and accurate information on their holdings.
This note sets out our thoughts on best practice in private capital valuations based on the FCA review and industry best practice in accordance with International Private Equity and Venture Capital (“IPEV”) and Alternative Investment Fund Managers Regulations (“UK AIFMD”) guidelines.
The FCA has classified private markets as a supervisory priority following the sector’s growth in recent years and is herein joined by other regulators including the International Organization of Securities Commissions, which in September 2023 reported on risks in private finance, the Bank of England, which in June 2024 highlighted the potential for vulnerabilities from opaque valuations, the Australian Prudential Regulation Authority (“APRA”), and the US Securities and Exchange Commission (“SEC”).
Financial regulators are reviewing exposure to risks that could cause financial instability and have voiced concerns about the valuation of private assets which are often not priced as frequently or as rigorously as those in public markets. This has become more relevant given the current high interest rate environment, volatility in public markets and increased allocations to private assets.
We observe a broad global regulatory interest in the valuations of private capital assets. On 17 December 2024, the Australian regulator released the results of their survey on valuation governance in the superannuation sector. APRA found material gaps related to how funds value private assets, calling its findings "concerning and indicative of the need for a continued drive to lift practices across the industry" and expecting trustees to formulate remediation plans. APRA said the most common issues relate to how funds manage conflicts of interest in the valuation process and a lack of demonstrated challenge to third-party valuations. Similarly, the SEC announced in 2023 that private capital managers are required to provide investors with detailed quarterly reports on performance and increased disclosure on expense, with the aim for greater transparency. This impacts not only US private funds but also managers who have US investors.
On 5 March 2025, the FCA released the results of their review of private market valuation practices, commenting that they “expect firms to consider the findings from this review and identify any gaps in their approach”. The review consisted of two phases. A questionnaire was sent to a sample of 36 firms in the industry exploring their approach to valuations. They held a variety of investments in private assets including private equity, private debt, venture capital and infrastructure assets. This was followed up with a series of in-depth reviews (consisting of document requests and on-site visits) with a subset of those firms.
Overall, the FCA found some good practices, notably in investor reporting, process documentation and use of third-party valuations. However, they did identify areas for improvements picking out conflicts of interest, the level of independence within firms’ own valuation functions and processes around ad-hoc valuations.
Read our detailed summary article on the findings of the FCA survey.
The FCA has provided guidance on what it considers good practice and recommends certain actions for managers, which we discuss below.
Source: FCA private market practices report - March 2025.
The FCA expects managers to “identify, document and assess all potential and relevant valuation-related conflicts, their materiality and actions they may need to take to mitigate or manage them”.
We have seen managers adopt more prescriptive valuation policies and make changes to fee structures and remuneration to mitigate potential conflicts of interest.
The purpose of a valuation policy is to remove ambiguity from the valuation process. The policy should describe the entire valuation process, define the responsibilities of stakeholders and the rights / composition of the valuation committee, prescribe a valuation methodology for each asset class setting out the rationale and limitations of each methodology, describe how valuation inputs are sourced and benchmarked, describe how value movements are documented, and prescribe the triggers and thresholds for an ad hoc valuation.
Key topics to consider are:
The FCA found that firms are proficient at identifying common conflicts of interest around fees and remuneration but observed that related policies are often generic and lack sufficient detail. Furthermore, the FCA thought that firms did not have a strong grasp on all potential conflicts of interest related to asset transfers, redemptions and subscriptions and secured borrowing. Managers should review the full range of potential conflicts of interest, document them, and explain actions taken to manage them.
Separately, the FCA commented on governance around firms’ in-house valuation functions and the impartiality they adopt in their practices. Concerns were raised about whether they had the requisite expertise and the composition of valuation / risk committees to ensure effective control, expert challenge and independence.
Key topics to consider are:
The FCA highlighted the risk of stale valuations resulting from an infrequent valuation cycle. The survey found that nearly all private equity managers value their positions on a quarterly basis. Private debt managers tend to value their positions more frequently, with approximately a quarter of managers valuing their positions every month.
Source: FCA private market practices report - March 2025.
This is in line with what we see in the market where the highest valuation frequency is for private debt assets, given that their valuation inputs (such as yield spread) can be more easily determined than for other asset classes. We see the lowest valuation frequency for early-stage equity investments that have milestone-based value inflection points.
Overall, we see movement towards more frequent valuations, especially if net asset value (“NAV”) is used for financing or subscriptions / redemptions, or if the fund has retail investors. Investments in distressed debt and special situations are typically valued on a bi-annual or ad hoc basis, but at least at every financial reporting date.
The FCA found that only a subset of firms had a defined process for ad hoc valuations and recommended that all firms should develop a framework that includes a threshold and the type of event that would trigger an ad hoc valuation.
Key topics to consider are:
Our valuations practice has seen an increase in reliance on third-party valuations in case of potential conflicts of interest or to provide expertise to value complex assets. This is born out in the FCA survey findings where most participants engaged a third-party valuation adviser.
Source: FCA private market practices report - March 2025.
It is important to consider what level of third-party support might be required: provision of certain valuation inputs and benchmarking, a positive assurance, a full independent valuation or a fairness opinion?
It is important to demonstrate a sufficient level of challenge to third-party valuations as the FCA noted potential commercial conflicts of interest could arise.
The FCA also highlighted potential conflicts of interest around asset transfers. In the market we have seen an increase in fairness opinions in relation to the transfer of assets between funds and into continuation funds.
The FCA recommends that managers clearly state what quantitative and qualitative information on fund and asset performance will be disclosed to investors and to separate the return on unrealised and realised investments in marketing materials.
Notwithstanding the challenges of sharing information with investors, the FCA suggests firms can improve their reporting and engagement with investors on valuations at a fund and asset level.
A robust valuation and governance process provides credibility to information that is disclosed. We observe that less detail might need to be disclosed if the disclosed information is comprehensive and of high quality.
In light of the ongoing scrutiny of private capital markets and the FCA recommendation to managers to consider “using industry guidelines to ensure their approach is in line with standard market practice”, we encourage alternative investment managers to act now to evaluate valuation risks and, where necessary, improve control processes.
For managers which already have valuation processes in place, or have established an internal valuations team, this may be an opportune time to review whether their valuation and decision-making processes are robust.
Contact Steven Koppenaal or Rhiannon Kinghall Were to discuss how we can assist in the review or implementation of a valuation policy based on industry best practice in line with FCA recommendations and guidelines from IPEV and UK AIFMD.
