FCA findings on private market valuation review

The Financial Conduct Authority (FCA) has released the findings of its multi-firm review into private market valuation processes. With the growth in private markets in recent years and the UK’s status as the largest location for private market activity (private equity, venture capital, debt, and infrastructure), there had been concern around a lack of rigour and robustness in the valuation process. 

By nature, private assets lack the regular third-party pricing and trading inherent with more liquid public markets. Compliance with fair value accounting requirements is by extension a more difficult, less transparent and more subjective exercise. What the FCA calls “inappropriate” valuation outcomes can stem from many risks, including conflicts of interest.

Key findings from the FCA’s review  

Processes: firms recognised the importance of maintaining robust processes, ie those that demonstrate independence, expertise, transparency and consistency. The FCA found many examples of good practice.

Conflicts of interest: some conflicts of interest were only partially identified and documented, including in the areas of valuation. While all firms recognised that conflicts of interest existed in their valuation process, not all conflicts were fully identified.

Independence: firms had varying levels of independence within their valuation processes. The FCA recommends firms assess the adequacy of the level of independence in both their valuation processes and valuation committees.

Consistency: many firms lacked defined processes or a consistent approach for ad hoc valuations, to revalue assets during market or asset-specific events. This could result in dated valuation marks, and the FCA recommends that firms establish clear criteria for when to trigger valuation reviews outside of the normal cycle and how to conduct these reviews effectively.

Transparency and disclosure: the FCA observed good practice that went beyond existing requirements.

Valuation models: rationales for changes in underlying assumptions were in some cases vague, and in other cases it was difficult to identify key changes and the robustness of decisions reached. 

Proportionality: firms should take account of their size when considering the FCA’s findings. Not all the issues and solutions will be relevant or applicable to all firms.

FCA’s review conclusion and next steps for businesses

The FCA discussed its key findings during the British Private Equity & Venture Capital Association's (BVCA) webinar on 8 April. It acknowledged the clear progress made since its earlier review in 2018 and reported that, overall, the industry’s standards in this area are in a good place. The FCA has now sent out detailed feedback to the firms involved in the review.

On the key area of proportionality, the FCA expects larger firms to have a “best in class” valuation process. It noted that smaller firms should design and operate their valuation process in a manner that befits their smaller size, while still applying the findings to the best of their ability so they can achieve a good standard.

Ultimately, the FCA intends to engage with industry bodies to further explore these findings in a multi-firm review that commences later in 2025 and aims to conclude in 2026. It also plans to share its findings to inform the work of other bodies such as the Bank of England’s work on Non-Bank Financial Institutions. In addition, it will feed into the International Organization of Securities Commissions' (IOSCO) international review on proportionate and consistent valuation standards globally in private markets.

What firms should be doing

In our experience, valuation best practice within a financial reporting context incorporates the following:

Good policy documentation and consistent application: we recommend the in-house valuation approach is well documented, and there is a focus on consistency in approach to valuing each specific asset, from acquisition through to exit. Conduct regular valuation reviews (preferably quarterly) that consider asset performance (actual vs. business plan), market metrics, and wider economic sentiment.

Independence and valuation judgement: there should be key personnel in the finance team experienced in the field of valuation who both own the process and have the seniority to challenge the investment professionals within their organisation. A valuation committee should have independent participants and should evidence its timely challenges to the firm’s valuations.

Timely and complete documentation of the process: ensure that valuation inputs are updated promptly, with clear summaries of the reasons for the changes, supported by both qualitative and quantitative context. Early dialogue with statutory auditors ahead of the year-end audit is desirable, as are regular conversations at key points throughout the year. Following the sale of an asset, firms should reflect on the valuation achieved in the context of the prior carrying value (ie back testing).

For more information on the FCA’s findings or to ensure your valuation processes align with best practices, please get in touch with your usual RSM contact.