Private market valuations: ‘Some room for improvement’
Image: FCA
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The Financial Conduct Authority has found good practice in private market valuations but said there is some room for improvement. The growing exposure of retail investors to these markets makes this particularly important, the FCA noted.
Given the growth of private market assets in recent years, including in pension fund portfolios, the Financial Conduct Authority has conducted a review of valuation processes of private equity, venture capital, private debt, and infrastructure assets.
Camille Blackburn, director of wholesale buy-side at the FCA, said good valuation practices are important for 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,” Blackburn said, but added that “there is still more to do, and we expect firms to carefully consider our findings”.
The FCA did not independently validate firms’ fair value assessments but selected valuation case studies to see how firms valued specific assets over time. The regulator found firms generally demonstrated good practice in investor reporting, process documentation and use of third-party valuation advisers, and were consistently applying valuation methodologies.
Private market valuations are not derived through daily trading but by inferring the price from similar public companies, comparable transactions or estimating future cash flows. In the absence of frequent market price discovery, valuations of these closed-ended, long-term types of funds also typically smooth the stated returns, making them look less volatile than publicly traded assets.
However, the FCA also found a need for better identification and documentation of potential conflicts of interest in the valuation process, and for greater independence within firms’ own valuation processes. In addition, it said some firms need to have better 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,” the FCA said.
The watchdog will use the findings in its Alternative Investment Fund Managers Directive review as it updates its rules in the Handbook. It said it will inform the FCA’s contribution to the International Organization of Securities Commissions’ review of global valuation standards to support the use of proportionate and consistent valuation standards globally in private markets.
Given the growth of private market assets in recent years, including in pension fund portfolios, the Financial Conduct Authority has conducted a review of valuation processes of private equity, venture capital, private debt, and infrastructure assets.
Camille Blackburn, director of wholesale buy-side at the FCA, said good valuation practices are important for 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,” Blackburn said, but added that “there is still more to do, and we expect firms to carefully consider our findings”.
The FCA did not independently validate firms’ fair value assessments but selected valuation case studies to see how firms valued specific assets over time. The regulator found firms generally demonstrated good practice in investor reporting, process documentation and use of third-party valuation advisers, and were consistently applying valuation methodologies.
Private market valuations are not derived through daily trading but by inferring the price from similar public companies, comparable transactions or estimating future cash flows. In the absence of frequent market price discovery, valuations of these closed-ended, long-term types of funds also typically smooth the stated returns, making them look less volatile than publicly traded assets.
However, the FCA also found a need for better identification and documentation of potential conflicts of interest in the valuation process, and for greater independence within firms’ own valuation processes. In addition, it said some firms need to have better 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,” the FCA said.
The watchdog will use the findings in its Alternative Investment Fund Managers Directive review as it updates its rules in the Handbook. It said it will inform the FCA’s contribution to the International Organization of Securities Commissions’ review of global valuation standards to support the use of proportionate and consistent valuation standards globally in private markets.
