FCA Issues Private Market Valuation Review Findings
FCA Issues Private Market Valuation Review Findings
In June 2024, the Financial Conduct Authority (FCA) announced it will be reaching out to Private Equity (PE) firms for a review on how asset managers conduct private market valuations. The FCA review stems from concerns that current market practices and oversight procedures for valuing private assets may lack rigour. We understand that the review aims to evaluate the quality and robustness of valuation practices, focusing on the integrity of the process and the justification of valuation decisions1.
What does Private market valuations review mean for Private Equity valuations?
The increased scrutiny on the private equity industry should prompt PE firms to proactively review and address any valuation risks and improve oversight procedures. Even PE firms with existing valuation procedures and in-house valuation teams should challenge whether their processes are sufficient. In practice, investment teams are often key decision-makers in asset valuations which may lead to a lack of independence or objectivity.
Addressing private market valuations
International Private Equity and Venture Capital (IPEV) Valuation Guidelines
Firms should be leveraging the International Private Equity and Venture Capital (IPEV) Valuation Guidelines, updated in December 2022, which outline best practices regarding the appraisal procedure, approaches and controls.
External valuations
We expect the FCA review to lead to changes that will enable investors to have greater transparency and confidence in the valuation of private investments. One option that is already available to the private capital market is to seek external, objective and independent valuation support. The benefits of external valuations include:
- Enhanced Credibility: External valuation provides an independent perspective, boosting confidence in the investment values.
- Expertise: External valuers bring specialised knowledge and experience, ensuring accurate and reliable valuations.
- Compliance: Aligning with regulatory expectations, such as those from the FCA, helps avoid potential issues.
- Transparency: Independent valuations offer clear and justifiable evidence, supporting the integrity of the valuation process.
- Risk Management: Identifying and addressing potential valuation risks early can prevent future problems
FCA Private Market Valuation Review Findings
The FCA has now published its review into private market valuations. It found many examples of good valuation practice, including its use of third party valuation services, although it highlights some areas for improvements:
- Level of independence in the valuation process to ensure effective control and expert challenge.
- Need for a defined, consistent approach for ad hoc valuations to revalue assets during market or asset specific events.
- Identification and documentation of valuation conflicts beyond fees and remuneration (related to investor marketing, secured borrowing, asset transfers, redemptions and subscriptions and uplifts and volatility).
Use of third-party valuation advisers is seen as good practice although they should be appropriately overseen and potential commercial conflicts identified and managed. The FCA says firms should consider the strengths and limitations of the service provided and disclosing the nature of the services used to investors, including portfolio coverage and frequency.
On methodologies, the FCA highlighted how use of a secondary methodology as a sense check was a helpful element.
What should firms do now
The FCA expects firms to consider the findings from its review and identify any gaps in their approach, taking into account their size and the materiality of identified gaps. In particular, it states firms should consider whether they should make improvements 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.
To find out more on this topic or how BDO can support you with your valuation requirements to meet regulatory expectations, get in touch with one of experts listed below:
