Private markets have become a vital component of modern investment strategies, offering unique opportunities for diversification and long-term growth. The Financial Conduct Authority (FCA) has conducted a comprehensive review of private market valuation practices to ensure fairness, transparency, and investor confidence as the market sector continues to expand. The UK’s private markets continue to be the largest centre for private market asset management in Europe, providing a means for investors to diversify investments and seek new sources of return.
Unlike public markets, private markets lack frequent trading and regular price discovery. This makes valuation practices critical for maintaining market integrity and investor trust. The FCA’s review emphasises the need for accurate and transparent valuations, which enable investors to make informed decisions and ensure fairness in transactions.
Scope of Review
This review features firms that operate in the UK, either managing funds, delivering portfolio management, or offering advisory services across private equity, venture capital, private debt, and infrastructure assets.
The review was completed in two phases. Phase 1 involved issuing questionnaires to a sample of firms, asking for information on their private market activity and their approach to valuing private assets. These responses were then used to select a sample for Phase 2, which included in-depth reviews of governance and processes through on-site visits, document requests, and data collection. The sample covered around £3 trillion of global private Assets Under Management (AUM). The aim was to provide the FCA with a clearer understanding of how firms value certain assets over time and how this valuation process works in practice.
Key Findings from the FCA Review
The FCA’s multi-firm review revealed both strengths and areas for improvement in valuation practices. The findings are summarised below:
- Governance Arrangements
Firms demonstrated good practices in governance, but there is room for improvement in managing conflicts of interest and ensuring independence in valuation processes. All firms identified conflicts in their valuation processes regarding fees and remuneration; however, not all firms had mitigated the effect of these conflicts through tools such as fee structures and remuneration policies.
- Functional Independence and Expertise
The review highlighted the importance of having independent and skilled professionals, such as external auditors, involved in the valuation process to enhance credibility and accuracy.
- Policies, Procedures, and Documentation
While many firms had robust documentation, the FCA identified the need for more comprehensive policies to address ad hoc valuation processes, especially to revalue assets during market disruptions.
- Transparency to Investors
Transparency remains a cornerstone of investor trust. The FCA found that firms need to improve communication with investors regarding valuation methodologies and outcomes. Firms demonstrating good practice in their communications with investors clearly highlighted changes in inputs, assumptions, and value, as well as providing qualitative information on the context and performance of the asset.
- Use of Third-Party Valuation Advisers
The use of external advisers was noted as a positive practice, but firms must ensure these advisers operate independently and without conflicts of interest. Firms should also consider whether they can invest in technology to improve consistency and reduce the risk of human error in their valuation processes.
Implications for Firms and Investors
For firms operating in private markets, the FCA’s findings serve as a roadmap for building robust valuation frameworks. Addressing the identified gaps not only ensures compliance with regulatory expectations but also positions firms to thrive in a competitive and growing market.
The FCA highlighted the following relevant regulatory references that firms should consider:
- FUND 3.9 – Requirements relating to the valuation of assets by alternative investment fund managers (AIFMs).
- FUND 3.10 – Duties of the AIFM regarding valuation functions.
- SYSC 4.1 – General organisational requirements, including governance and internal controls.
- SYSC 5.1 – Employees, agents, and outsourcing responsibilities.
- SYSC 10.1 – Requirements for identifying, managing, and mitigating conflicts of interest.
- COBS 2.1.1R – Duty to act honestly, fairly, and professionally in accordance with the best interests of clients.
- COBS 2.2.1R – Principles relating to inducements and fees.
For investors, understanding the FCA’s findings can help navigate the private market landscape with confidence.
The FCA’s review aligns with its broader goal of supporting the UK’s status as a global investment hub. By prioritising transparency and accountability, the industry can continue to attract investment and drive economic growth.
How can Complyport help?
Complyport can help your firm understand the FCA’s expectations, as well as the impact of these expectations on your firm. We can support your firm by providing:
- Regulatory Guidance: Helping your firm understand the FCA’s expectations and providing expert advice on the relevant regulatory requirements for valuation methods.
- Ongoing Support: Providing ongoing support to ensure that your firm remains compliant as regulations evolve in private markets.
- Compliance Documentation: Policy and procedure reviews and updates, including drafting new policies to take account of the FCA’s feedback.
- Authorisation Applications: For firms looking to enter the private market sector, Complyport is experienced with application preparation and submission for FCA approval.
Ready to Enhance Your Valuation Framework?
Complyport is ready to help your firm navigate the FCA’s expectations on private market valuations. Whether you require regulatory advice, support with drafting and reviewing policies, or guidance on governance arrangements, our team of experts is here to help.
Contact us today to book a meeting with one of our Subject Matter Experts and ensure your firm is prepared for evolving market expectations.
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