The Financial Conduct Authority’s (FCA) review of private market valuation processes has found good practice but some room for improvement.
Private markets have grown significantly in recent years with the UK continuing to be the largest centre for private market asset management in Europe. Private market assets don’t have the frequent trading and regular price discovery present in more liquid public markets, so robust valuation practices are important for fairness and confidence in private markets.
The FCA recently completed a multi-firm assessment of valuation processes and governance for valuing private equity, venture capital, private debt, and infrastructure assets. Firms generally demonstrated good practice in areas, such as investor reporting, process documentation, use of third-party valuation advisers, and were consistently applying valuation methodologies.
However, the FCA found areas where firms need to improve. These included the need for better identification and documentation of potential conflicts of interest in the valuation process, and increased independence within firms’ own valuation processes. The FCA also found that some firms needed to enhance processes for ad hoc valuations in times of market disruption.
Improvements in these areas are particularly important with growing retail investor exposure to private assets.
Camille Blackburn, director of wholesale buy-side at the FCA, said:
“The UK is the largest centre for private asset management in Europe. Investor demand from individuals and institutions has driven significant growth. Good valuation practices are key to maintaining fairness and confidence as the market grows. We were pleased that firms could usually evidence independence, expertise, transparency and consistency in their valuations process.
“There is still more to do, and we expect firms to carefully consider our findings.”
Galina Dimitrova, Director, Investments & Capital Markets at the Investment Association, said:
“Private markets are a significant growth area for investment managers and have increasingly become an important part of a diversified investment portfolio. Ensuring firms are carrying out robust and accurate valuations is mission critical for the long-term success of private markets. Getting this right will boost confidence amongst investors whilst encouraging firms to invest in developing their private market capabilities.
“The IA has worked extensively with government, policymakers, regulators and key industry stakeholders to deliver the benefits private markets can provide. We support the FCA’s recognition that a robust valuation is based on independence, expertise, transparency and consistency, and look forward to working with our members and the regulator as the industry looks to implement the FCA’s best practice recommendations.”
The findings will be used in the FCA’s review of Alternative Investment Fund Managers Directive (AIFMD) as it updates its rules in the Handbook and will inform the FCA’s contribution to IOSCO’s review of global valuation standards to support the use of proportionate and consistent valuation standards globally in private markets.
