At a glance
Why is the FCA focusing on valuations?
Private market strategies have experienced significant growth over the last decade, increasing the importance of robust and transparent valuation practices. Unlike listed securities, assets such as private equity, private credit, infrastructure and real estate often rely on models, assumptions and professional judgement, rather than observable market prices.
With an eye to investor protection, the FCA needs firms to demonstrate that valuations are robust, well governed and unbiased.
Responsibility for valuation sits firmly with the AIFM. While valuation activities can be delegated, accountability cannot. Under the proposed regime, the FCA is likely to expect AIFMs to demonstrate:
- How valuations are produced
- Who challenges valuation inputs and assumptions
- How conflicts of interest are identified and managed
- How pricing exceptions are escalated
- Who has ultimate responsibility for approving the valuation process
In many AIFM structures, investment advisers provide valuation recommendations. However, the FCA is signalling that the AIFM must be able to demonstrate independent oversight and challenge, rather than simply accepting sponsor-provided valuations.
Managing conflicts of interest is critical
A central theme running throughout the FCA’s proposals is the need for firms to identify, document and actively manage conflicts of interests arising from the valuation process.
Valuation decisions can have a direct impact on fund economics and stakeholder outcomes, creating potential tensions between commercial objectives and fair valuation practices. Areas that may give rise to conflicts include:
- Performance fees linked to valuation outcomes
- Carried interest calculations
- Fundraising activities that rely on reported net asset value (NAV)
- Borrowing facilities and covenant calculations
What does this mean in practice?
As ever, documentation is king. AIFMs will need:
- Formal valuation committees with detailed meeting records
- Independent committee members (i.e. separate membership to the investment committee)
- Documented challenge logs and valuation adjustment records
- Governance frameworks that clearly evidence oversight and decision making
- Escalation procedures for situations where valuations are uncertain or disputed
In addition, the FCA will expect documented procedures across external valuer selection, valuation policies, override procedures, stress testing and conflict management.
Greater scrutiny of external valuers
The FCA recognises that many funds rely on specialist independent valuation providers. However, appointing an external valuer does not remove the AIFM’s responsibilities.
Firms should understand the valuation methodologies being applied, the assumptions underpinning them, how frequently valuations are performed and any limitations in the approach. On top of this, they should conduct appropriate due diligence on those service providers and maintain ongoing oversight of their work.
With the FCA proposing to remove the requirement for external valuers to accept direct liability in certain circumstances, the use of specialist third-party valuation providers may become more widespread. Even so, the FCA is making it clear that responsibility for valuation oversight remains with the AIFM. Delegation does not remove accountability.
Key areas for AIFMs to focus on
While the final rules have yet to be confirmed, AIFMs can start assessing their readiness now by focusing on four key areas that are likely to attract regulatory attention.
| Governance | Is there a formal valuation committee?
Is independence adequate? Are challenges documented?
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| Delegates | How are sponsor-provided valuations reviewed?
Is there evidence of independent challenge? Are assumptions routinely tested?
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| Policies | Are methodologies documented?
Are valuation overrides recorded? Are conflicts clearly identified?
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| Evidence | Could you demonstrate to the FCA how a particular NAV was reached six months later?
Is there a complete audit trail?
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How IQ-EQ can help
As the FCA places greater emphasis on valuation oversight, many AIFMs will be reviewing whether they have the expertise, independence and documentation needed to meet evolving expectations.
IQ-EQ’s valuation specialists support fund managers, AIFMs and investment professionals across a wide range of private asset classes. Our team provides independent valuation services, fairness opinions, financial modelling and valuation advisory support, helping firms establish robust and defensible valuation frameworks aligned with recognised industry standards, including the International Private Equity and Venture Capital Valuation (IPEV) Guidelines and International Valuation Standards (IVS).
We currently support more than 160 funds through valuation committee participation and independent valuation services, helping clients strengthen governance, manage conflicts of interest and demonstrate effective oversight throughout the valuation process.
Whether you are assessing your current valuation framework or looking for additional independent challenge, our UK compliance consulting team can help you prepare for the FCA’s evolving expectations.
To discuss your valuation framework or learn more about our valuation advisory services, get in touch with our team.
About the author
Rachel Aldridge is Managing Director of IQ-EQ’s Regulatory Compliance business in the UK. Through its subsidiary G10 Capital, IQ-EQ is one of the UK’s largest third-party AIFM and regulatory hosting providers, supporting fund managers across a broad range of alternative asset strategies.
Frequently asked questions
When will the FCA’s new AIFM rules take effect?
Which firms will be most affected by the proposed reforms?
Why is the FCA focusing on valuation governance?
What should AIFMs do now?
