Properly Valuing Private Equity, Venture, Real Estate, and Other Private Markets Assets: Some Pointers for UK and EU Managers

In our recent alert “New Year, Similar Concerns: The FCA’s 2025 Priorities for UK Private Fund Managers,” we discussed the updated supervisory strategy and priorities which the Financial Conduct Authority (FCA) has for alternative investment managers, such as private fund managers. In addressing its desire to support confident investing in private markets, the FCA focused on the valuation of private fund assets and management of conflicts of interest.

The FCA has now published a web page containing the findings of its review of various FCA private fund managers’ (Managers) valuation processes for private market assets.

The review notes the importance of robust valuation practices in private markets, which do not have the frequent trading and regular price discovery present in more liquid public markets. As the FCA notes, Managers estimate private asset values using judgement-based approaches to meet applicable accounting standards.

The review assessed Managers’ valuation processes and governance in respect of private equity, venture capital, private debt, and infrastructure assets. The FCA did not independently validate firms’ fair value assessments for specific assets.

The review noted many examples of good practice, which will be useful for Managers in the design and/or assessment of their valuation processes against the FCA’s expectations. Indeed, given that the standards against which the FCA assessed valuation practices have their basis in European Union (EU) law, the FCA’s observations will be useful for EU Managers.

The Compliance Yardsticks

For all Managers, including alternative investment fund managers (AIFMs), portfolio managers, and investment advisers, the FCA assessed valuation processes against the FCA principles for businesses, including those on due skill care and diligence and conflicts of interest. For AIFMs, the FCA also assessed them against the rules in FUND 3.9 Valuation, originally made to implement Article 19 of the Alternative Investment Fund Managers Directive (AIFMD) and Articles 67–74 of the AIFMD Level 2 Regulation.

The Good

For Managers looking to establish what can be classified as good valuation procedures, the following points emerge from the FCA’s comments:

• Robust valuation processes are those that could evidence independence, expertise, transparency, and consistency.
• Managers should look to enhance the quality of reporting to investors, keep a record of valuations, use third-party valuation advisers to introduce additional independence and expertise, and seek a consistent application of established valuation methodologies. 
• Managers should expressly recognise the importance of maintaining robust processes that acknowledge the role of investor protections, given the judgement required and risks present in valuing private assets.

The Bad

On the other hand, Managers should look to take the following steps:

• Recognise that conflicts in valuation process related to fees and remuneration and the limitation of these through fee structures and remuneration policies are important. 
• Identify and document other potential conflicts, such as conflicts related to investor marketing, secured borrowing, asset transfers, redemptions and subscriptions, and uplifts and volatility; assess the materiality of these conflicts, and identify actions Managers may need to take to mitigate or address them.
• Assess whether there is sufficient independence in the valuation functions and the voting membership of Managers’ valuation committees to enable and ensure effective control and expert challenge.
• Ensure that there is a defined process or a consistent approach for ad hoc valuations to revalue assets during market or asset-specific events. Also consider the types of events and quantitative thresholds that could trigger ad hoc valuations, and document how they are to be conducted.

Satisfying Regulators

The FCA states that it will expect Managers to consider the findings from this review and identify any gaps in their approach, taking into account their size and the materiality of identified gaps. In light of the observations on good and bad practices above, the FCA states that it would expect Managers to consider whether they should make improvements in:

• managing and overseeing 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

Please reach out to your Goodwin contact or any of the contacts below should you want to discuss any of the matters raised in this briefing.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.