UK FCA highlights areas for improvement in private market valuation processes

The UK Financial Conduct Authority (FCA) has published the findings of the multi-firm assessment of valuation practices and governance for valuing private equity, venture capital, private debt and infrastructure assets. The review covered firms managing funds or providing portfolio management and/or advisory services in the UK for private equity, venture capital, private debt and infrastructure assets. The FCA found that many firms had good practices in valuation processes, including the quality of reporting to investors, documenting valuations, using third-party valuation advisers to introduce additional independence and expertise and consistent application of established valuation methodologies. However, the FCA also identified areas for improvement, including:

• Governance of valuation processes, in particular, detailed and accurate record-keeping of how valuation decisions are reached.
• Conflicts of interest. Firms should consider areas where conflicts might arise and ensure that the firm is identifying, documenting, and addressing potential conflicts in valuation processes.
• Independence of valuation functions and voting membership of valuation committees to ensure effective control and expert challenge.
• Establishing defined processes for ad hoc valuations to mitigate the risk of out-of-date valuations, including thresholds and types of events that would trigger an ad hoc valuation.

The FCA expects firms to consider the review findings and to take steps to implement improvements to their processes. The findings will feed into the FCA's review of the Alternative Investment Fund Managers Directive.

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