By Harry Barnes, Principal Compliance Consultant
On 5 March 2025, the UK’s Financial Conduct Authority (FCA) published the outcome of its multi-firm review of private market valuation practices. The review occurred last year in two phases covering fund managers, portfolio managers and fund advisors. The findings have identified key gaps in the practices observed by the FCA.
Why did the FCA conduct this review?
The private asset market has grown significantly in recent years in the UK, with London being the largest centre for asset management and advisory for private assets in Europe. The FCA has previously raised its concerns around valuation practices in this space, including in a ‘Dear CEO’ letter to asset management firms in February of this year.
The FCA is not the only body concerned about valuation practices in private markets, with the International Organization of Securities Commissions (IOSCO) having published a report in September 2023 entitled Thematic Analysis: Emerging Risks in Private Finance.
The concerns around private asset valuation practices have arisen from worries about poor outcomes for investors, particularly any direct or underlying retail investors, as well as wanting to ensure there is confidence in the valuation practices of fund managers.
What are the key findings of the review?
The FCA noted that the most robust valuation practices identified were those evidencing independence, expertise, transparency and consistency.
At a high level, evidence of good practices as identified by the FCA included:
- Quality reporting to investors
- Documentation of valuations
- Using third-party valuation advisers to introduce additional independence and expertise
- Consistent application of established valuation practices
The areas of greatest concern for the FCA included the following:
- Conflicts – Whilst firms identified the inherent conflicts between valuation and remuneration and had limited these conflicts in appropriate ways, such as through the remuneration structure, other potential conflicts were not as robustly identified. These include potential conflicts relating to marketing, secured borrowing, asset transfers, redemptions and subscriptions, as well as uplifts and volatility
- Independence – The FCA expects firms to assess whether they have sufficient independence in their valuation functions and amongst the voting members of the valuation committee to ensure effective control and challenge to valuations
- Ad hoc valuations – The FCA identified that many firms did not have defined processes or consistent approaches to conducting event-driven ad hoc valuations. Ad hoc valuations are important to reduce the risk of outdated or stale valuations. Firms are encouraged to consider the type of events and thresholds that can trigger ad hoc valuations and to document how these valuations would be conducted
What actions should firms be taking?
The FCA expects firms to consider the full findings of the review and identify any gaps in their systems and controls. In particular, firms should consider whether there is need for improvement in:
- The governance of their valuation process
- Identifying, documenting and addressing potential conflicts in their valuation process
- Ensuring functional independence for their valuation process
- Incorporating defined processes for ad hoc valuations
This review should cover all elements of a firm’s systems and controls infrastructure implemented to undertake valuation, including policies and procedures, governance structures, conflicts mapping and the use of independent third parties.
It is best practice for the outcome of any review, and associated remediation items, to be presented to the governing body for sign-off.
How IQ-EQ can help
At IQ-EQ we have an expert team who can advise on valuation practices for private assets. We are well qualified to conduct independent reviews of firms’ valuation systems and controls against the FCA’s expectations, including but not limited to the areas of concern identified by the FCA: governance structure reviews, policy and procedure frameworks, as well as conflicts of interest mapping.
To discuss your firm’s approach to private asset valuations or to find out more about the support available from IQ-EQ’s expert compliance consulting team, contact us today.
