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A review of fund and portfolio managers found a number of good practices, but also revealed the need for improvement in areas such as conflict management.

By Rob Moulton, Nicola Higgs, Becky Critchley, and Charlotte Collins

On 5 March 2025, the FCA published the findings from its review of private market valuation practices. The FCA undertook this review due to the growing importance of private markets and concerns that robust valuation practices need to be implemented to ensure trust and confidence in these markets. The FCA highlights that effective valuation practices are needed to counterbalance the fact that valuations in private markets are less transparent than in public markets, and potentially susceptible to vulnerabilities such as conflicts of interest.

The FCA reviewed the robustness of valuation processes by firms managing funds or providing portfolio management and/or advisory services in the UK for private equity, venture capital, private debt, and infrastructure assets. This involved sending a questionnaire to a sample of 36 firms, and then conducting an in-depth review of governance and processes in relation to a sub-set of these firms.

Key Findings

The FCA found many examples of good practice, including in areas such as investor reporting, process documentation, use of third-party valuation advisers, and consistent application of established valuation methodologies. However, the findings also revealed the need for better identification and documentation of potential conflicts of interest in the valuation process, and increased independence within firms’ own valuation processes. Further, the FCA found that firms could improve processes for ad hoc valuations during market disruption.

Governance

The FCA found that nearly all firms surveyed had specific governance arrangements in place for valuations, and most had valuation committees which resulted in greater independence and oversight of the valuation process. However, it also found that sometimes minutes of these committees failed to record all relevant details on how valuation decisions were reached. Therefore, it recommends that firms ensure their governance arrangements aid accountability, and that they keep appropriate records of valuation decisions.

Conflicts of Interest

Firms were found to have identified conflicts in their valuation process around fees and remuneration. However, many firms had not actively considered or documented other conflicts in their valuation process in sufficient detail.

The FCA highlights how conflicts involving valuations can arise in the following areas:

  • Investor fees: some fund structures have a direct link between the current net asset value of the fund and fees paid by investors. Even fund structures that inherently limit conflicts related to fees can be susceptible to conflicts of interest that could dissuade them from taking appropriate write-downs to avoid lost management fees.
  • Asset transfers: not all firms use third-party valuations or opinions for asset transfers, or put in place additional controls, and instead rely on in-house valuations.
  • Redemptions and subscriptions: redemptions and subscriptions may be priced using a fund’s net asset value. Conflicts may arise between new, exiting, and remaining investors, and valuation frequency may not align with dealing frequency.
  • Investor marketing: firms may use the unrealised performance of existing funds to market new funds, which might encourage them to ensure valuations show positive and stable movements in value over time.
  • Secured borrowing: valuations could be inflated to secure a higher level of borrowing, or to avoid breaching a loan-to-value ratio covenant.
  • Uplifts and volatility: firms may consider that investors prefer to see certain traits, such as a smooth return profile over time, and an “uplift” on exit, which might lead to valuations exaggerating stability.
  • Employee remuneration: links between remuneration and valuations can create direct and indirect conflicts, such as when valuations affect the perception of individual performance.

Firms are expected to consider the above conflicts and document those that are relevant to them, along with appropriate mitigating actions.

Functional Independence and Expertise

The FCA found that some firms very clearly demonstrated functional independence between valuation functions and portfolio management functions. Good practice included maintaining a dedicated function to lead on valuations, and ensuring the valuation committee’s voting membership consisted of independent individuals with sufficient valuation expertise. However, the FCA notes that some structures it observed require greater oversight by valuation or risk committees. It urges firms to consider whether including investment professionals as voting members on valuation committees ensures appropriate independence and conflict management.

Policies, Procedures, and Documentation

The FCA observes that not all firms’ valuation policies provided detail on the rationales for selecting methodologies and their limitations, nor the required inputs and data sources. Further, most did not include a description of the safeguards for the functionally independent performance of valuations. While all firms surveyed documented the valuation models used, the rationales recorded for key assumption changes were vague in some cases.

Firms are encouraged to consider whether they document valuation models consistently and clearly across assets, engage with auditors appropriately, and properly consider insights from back-testing to inform their valuation approach.

Frequency and Ad Hoc Valuations

The FCA stresses the importance of regular valuations, highlighting that stale valuations can lead to greater harm when firms use valuations to charge fees or to price redemptions and new subscriptions. The FCA found that most firms surveyed did not have defined quantitative or qualitative thresholds for triggering ad hoc valuations, or a formal process for conducting these valuations. It also observed that most firms did not perform ad hoc valuations in response to significant market events such as the COVID-19 pandemic and the Russia-Ukraine conflict. The FCA suggests that firms should consider incorporating a defined process for ad hoc valuations.

Transparency to Investors

Most firms reported quantitative and qualitative information on performance at both the fund and asset level. They also reported holding regular conference calls with investors. The FCA encourages firms to consider how they can improve their reporting to and engagement with investors on valuations to increase transparency and investors’ confidence in their valuation process.

Application of Valuation Methodologies

The FCA reviewed the consistency of how firms applied valuation methodologies and assumptions, including where they made significant adjustments. However, it did not seek to independently validate firms’ fair value assessments. It found that, for the most part, the methodologies used were consistent by asset class, and firms often applied the designated methodologies consistently.

The FCA suggests that firms should consider using industry guidelines to ensure their approach is in line with standard market practice, and applying secondary methodologies to corroborate their judgements.

Use of Third-Party Valuation Advisers

The FCA notes that firms need to be aware of the potential conflicts when using third-party valuation advisers, and take steps to manage them. Firms should consider the limitations of the service provided, take steps to ensure the independence of the third-party valuation adviser, and remember that the firm retains responsibility for valuation decisions. The FCA also suggests that firms consider disclosing the nature of the services used to investors.

Next Steps

The FCA makes clear that it expects affected firms to consider the review’s findings, identify any gaps in their own approach, and take necessary action to make relevant improvements. Firms need to ensure their valuation processes are robust, with a strong governance framework and audit trail. They also need to make sure that boards and valuation committees receive appropriate information to ensure effective oversight of this area. The FCA also plans to conduct targeted follow-up work with outlier firms identified in the review.

The FCA notes that the findings from the review will be used to inform its review of the AIFMD. The FCA is due to examine the regime this year as part of its work to review and restate assimilated law.

As mentioned in its recent portfolio letter to asset managers, the FCA will be conducting further work on conflicts of interest in private markets more broadly. It will carry out a multi-firm review to assess how firms oversee the application of their conflict-of-interest framework through governance bodies and through the three lines of defence.