The impact of the FCA review of private market valuation practices

The FCA multi-firm review of valuation practices and processes for private market assets outcomes were published on 5 March 2025.

Generally, firms were found to have demonstrated good practice in many areas, but the FCA also identified several aspects that could be improved. The key findings were centred around:

• The governance of the valuation process
• Identifying, documenting, and addressing potential conflicts in the valuation process
• Ensuring functional independence for the valuation process
• Incorporating defined processes for ad hoc valuations

Looking in more detail at the issues and recommendations applicable to our venture capital and private equity clients:

Governance arrangements

Almost all firms included in the review had valuation committees tasked with responsibility for valuation decisions. The FCA expect firms to assess whether they have sufficient independence built into their valuation process. Good practice is to staff the valuation committee with people independent from portfolio management, though clearly this is more difficult within smaller firms. The review also recommended these committees maintain clear records, particularly covering how valuation decisions are reached.

Conflicts management

Firms are required to take steps to identify, avoid and manage conflicts of interest. Some of the more commonly seen conflicts are as follows:

For closed-ended limited partnerships, where the management fee is based on the value of invested capital, the write-down of an asset may represent a decrease in the value of invested capital with a consequential reduction of management fees. In this case, managers face a conflict of interest that could dissuade them from taking appropriate write-downs to avoid lost management fees.

Asset transfers between vehicles – where manager’s valuation determines transfer price, especially if it crystallises carried interest. Here, many firms sought an independent fairness opinion for the price at which assets were transferred.

Investor marketing – use of unrealised performance to support fundraising for new funds. This creates an incentive to show positive, stable valuation movements. Good practice recommendations are to clearly separate realised and unrealised performance in marketing materials and to include details of the firm’s approach to valuations.

Transparency to investors

The FCA encourages transparency to increase confidence in decision making related to private assets. They noted many firms demonstrated good practice by reporting qualitative and quantitative performance data at fund and asset level. This could be enhanced by including a ‘value bridge’ to draw out the components of changes in valuations (such as the multiple applied, underlying earnings/revenue, exchange rates etc).

Application of valuation methodologies

a) The FCA found that venture capital firms typically used the last available transaction price, typically from recent funding rounds, as the basis for valuation, before using multiples where assets achieved revenue-generation.

b) Most private equity firms used the market approach (using prices and/or multiples generated by comparable market transactions) as their primary methodology. Others used a mix of market approach and income approach (converting future amounts such as cash flows to a current enterprise value).

The FCA made the straightforward statement that firms are expected to apply valuation methodologies and assumptions consistently and make valuation adjustments solely based on fair value.

They also pointed out the use of a secondary methodology as a sense check was good practice.

Conclusion

The findings and recommendations arising from review will impact firms differently depending on their size and the sophistication of their current approach to valuations.

All private asset managers should now review their valuation practices and governance arrangements.

Would you like to know more?

If you would like to discuss any of the above and how it impacts you, please speak to your usual Blick Rothenberg contact or Simon Lewis using the form below.