FCA Private Market Valuation Review

Without the frequent trading and regular price discovery present in more liquid public markets, firms must estimate private asset values using judgement-based approaches to meet applicable accounting standards. This introduces a risk that firms could inappropriately value private assets, for reasons including insufficient expertise, focus, or poorly managed conflicts of interest, increasing the risk of harm to both investors and market integrity.

On 5 March 2025, the UK Financial Conduct Authority published a report (the Report) containing observations and feedback from its Private Market Valuation Review (PMVR). This had been trailed during the previous week in the FCA's Asset Management and Alternatives Supervisory Strategy letter as a key FCA supervisory priority for 2025.

The Report is the culmination of a detailed two-stage review process undertaken by the FCA during the previous year. Phase 1 of the PMVR involved questionnaires to 36 FCA-regulated firms and Phase 2 involved the FCA undertaking direct follow-up activities within a subset of those firms. As a result, firms which were included in the Phase 2 exercise may also receive some direct, firm-specific feedback from the FCA.

The FCA now expects firms to consider the Report and benchmark their own valuation policies and processes against the FCA's observations. Travers Smith can assist firms by providing template impact assessments and internal briefing materials, as well as more bespoke analysis, if required.

This briefing summarises the scope of the Report, the key issues it contains and particular actions that firms may now need to take.

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Which firms are affected by the Report?

The PMVR covered a range of FCA-regulated private market firms, including fund managers, discretionary portfolio managers and advisers.

As a result, the Report's findings will be relevant to any of these types of firms where they provide services in relation to private market assets and those services incorporate or depend upon judgement-based asset valuations.

The FCA has indicated that the findings in the Report may also be relevant to UK UCITS management companies where a UCITS has invested in assets requiring Level 2 or Level 3 valuations (see "Which assets are affected by the Report" below).

The Report is not directly applicable to firms that are not FCA-regulated, such as a non-UK fund manager that is marketing funds under the UK national private placement regime. However, as discussed later in this briefing (see "What are the next steps following the report?"), the FCA is leading wider international work in relation to valuation principles for fund portfolios. Therefore, the FCA's feedback in the Report may be an indicator of the future direction of travel of international standards in this area and where relevant, firms may wish to consider the implications for their wider groups.

Which assets are affected by the Report?

The PMVR focused on private equity, venture capital, private debt and infrastructure assets.

However, although those asset classes formed the basis of the FCA's review, the key principles underlying the FCA's observations in the Report may also be relevant to other asset classes that may require judgement-based valuations, such as real estate assets.

Within those asset classes, the FCA's principal focus was on assets that are generally valued using the Level 3 approach under International Financial Reporting Standards (see box below). These are assets that lack observable value inputs and so require a higher level of judgement to value, resulting in an increased risk of conflicts of interest.

However, in the context of UCITS funds, the Report briefly refers to both Level 2 and Level 3 valuations. This suggests that firms should also consider the FCA's observations in the context of assets valued by Level 2 inputs, given that some level of judgement may still be required to select appropriate observable inputs for the asset in question.

To the extent that a firm is providing services in relation to assets valued by reference to Level 1 inputs (for example, actively traded listed debt, or positions in listed equities acquired as part of stake building), many of the observations in the Report will not be directly relevant. This is because the liquid markets for those assets generally obviate the need for subjective valuation inputs and therefore avoid the corresponding potential conflicts of interest.

When do firms need to have taken action in relation to the Report?

The Report does not specify a particular deadline by which firms need to have undertaken their gap analysis and implemented any necessary improvements or changes.

However, given the importance that the FCA attaches to proper management of potential conflicts of interest, it is likely that the FCA will expect firms to act promptly now that the Report has been published. As a result, firms should begin their benchmarking activities as soon as possible, focusing first on the most material action points identified by the FCA.

If a firm identifies that there are material issues that need to be addressed and it will take time to restructure the relevant arrangements, the firm should ensure that it has a clear action plan to deliver the necessary improvements within a reasonable timescale. This will allow the firm to demonstrate to the FCA, if asked, that it has been engaging appropriately with the issues raised in the Report, even if it has not yet been able to resolve all relevant points.

Does the feedback in the Report apply to valuation activities carried on outside the UK?

The Report does not expressly address the territorial application of the FCA's feedback.

Where a UK firm operates a UK-based valuation committee or function, it is clear that the FCA's feedback in the Report will apply in full to the firm (except to the extent that the firm's business model means that any element of the feedback is not relevant).

For international businesses, the situation is potentially more complex. At a basic level, the Report will be relevant to any group that contains an FCA-regulated firm providing regulated activities in relation to private market assets. Such groups will need to consider the issues raised in the Report and carry out their own assessments of how the FCA feedback applies in the context of their business structures.

Many firms may conclude that there is merit in applying the FCA's feedback across their groups, given that:

The Report contains a number of sensible observations about potential conflicts of interest which firms may wish to address across their operating structures;
The FCA has a leading role in updating IOSCO's framework on valuation of fund assets and therefore the FCA's feedback in the Report is likely to reflect the direction of international standards in the near future; and
Firms may wish to avoid the analytical and operational complexity that could result from a narrower application of the FCA's feedback to only limited parts of the group's operations.

Alternatively, firms may decide to limit their application of the FCA's feedback by conducting a detailed analysis of how the output of an offshore valuation function interacts with their UK regulated businesses. In that case, they will need to work through their existing operating models to identify the relevant touchpoints, considering issues such as:

Whether the UK firm is marketing or fundraising using output from an offshore valuation function;
Whether the UK firm's regulated activities (e.g. advising or managing investments) involve using the output from an offshore valuation function;
Whether the UK firm relies on the output from an offshore valuation function to facilitate reporting to investors;
Whether the offshore valuation function has UK members or whether other UK employees contribute inputs into the offshore valuation function to help it produce its output; and
Whether the UK firm is merely passing on valuation information produced by an offshore entity and is not carrying on a regulated activity or otherwise involved in producing that information (such as where a UK-based investor relations function may simply forward reports from an offshore manager to investors).

Where firms adopt this detailed approach to applying the feedback in the Report, they should ensure that they record their rationale clearly so that they are able to explain this to the FCA, if asked.

Is it mandatory for firms to implement all the points raised in the Report?

The Report is a detailed and lengthy publication which the FCA has divided into action points, good practice and general commentary.

ACTION POINTS: It appears that the FCA is expecting all firms to take appropriate action in relation to these points. In some cases, the action may only require a firm to "consider" a point, in which case the firm should at least be able to demonstrate that it has analysed the relevant issues, but the firm may not always need to implement the associated requirement if it is able to justify why this would not be appropriate for its business model.

GOOD PRACTICE: Firms may be able to argue that the good practice points are not mandatory. However, the extent to which a firm might be expected to address these may depend upon the size and complexity of the firm's operations and the materiality of the relevant points to the firm's business. In the context of other regulatory frameworks (such as Consumer Duty), there has been an increasing trend for the FCA to label elements of guidance as good practice but to treat them in practice as if they are quasi-rules, especially for larger firms. Firms will therefore need to decide how to approach these points, having regard to their broader risk appetite and the relevance of each particular issue to the firm's operating model.

WIDER COMMENTARY: The broader narrative in the Report contains a range of other detailed points. While these have not been specifically called out by the FCA, they often expand upon the FCA's concerns or thinking on issues raised in the action points or good practice. As a result, firms should consider how the broader observations feed into their reviews of the action points and good practice items.

Firms should ensure that they keep appropriately detailed records of their analysis of the above points and how they apply in the specific context of their businesses. This will allow the firm to provide evidence to the FCA that it has completed the requested gap analysis and to explain the approach it has adopted in relation to specific points.

Is there any proportionality "carve-out" for any of the issues raised by the Report?

The FCA does not expressly refer to proportionality in the Report but does state that firms should "take into account their size and the materiality of identified gaps" when carrying out their benchmarking exercises.

This suggests that the depth of the firm's benchmarking exercise and the resulting actions it might be expected to take may depend on its size and the nature of its business. It may therefore be relevant to consider issues such as the proportion of assets in the relevant portfolio(s) that need to be valued by reference to Level 2 or Level 3 inputs, or the materiality of any monetary sums involved (for example, in relation to valuation conflicts connected with fees or remuneration).

Where a firm adopts a particular approach on the basis of proportionality, it should ensure that it properly records the rationale for doing so.

What are the key areas of FCA focus in the Report?

Although the Report is dense and firms should consider its contents in full, the FCA has flagged the following four specific key issues for firms:

Governance of the firm's valuation process;
Identifying, documenting and addressing potential conflicts of interest in the valuation process;
Ensuring functional independence for the valuation process; and
Incorporating defined processes for ad hoc valuations.

We discuss each of these in further detail below, highlighting key actions for firms.

Governance of valuation processes

The Report emphasises the importance of firms being clear on which governance body is responsible for making decisions about valuations (for example, the valuation committee) and whether the body is a decision-making or advisory body.

The FCA stresses that firms must keep detailed records of valuation decisions, including in relation to how each decision was reached. Inadequate record keeping is flagged in the Report as a frequent area of weakness that may make it harder for key internal and external stakeholders to understand and scrutinise the firm's approach to valuations. Firms may need to reflect carefully on their record keeping processes, having regard to the potential difficulty of clearly capturing technical and nuanced discussions, as well as potential sensitivities around who should have access to detailed valuation information internally (for example, where this may contain sensitive commercial information about portfolio companies).

Firms will also need to ensure that their valuation procedures are sufficiently detailed to allow oversight functions to validate that the procedures are being applied properly in practice. This is because the FCA is concerned that vague or poorly documented procedures may lead to inconsistent approaches to valuation and ineffective oversight.

        
        Key actions
    
Ensure that existing governance arrangements provide clear accountability for valuation processes.

Ensure valuation procedures are documented in sufficient detail.

Ensure that there is robust oversight of valuation processes.

Ensure that the firm keeps accurate and detailed records of valuation decisions and the rationale for them.

Identifying and addressing conflicts of interest

The Report notes that many firms had not fully identified all relevant valuation-related conflicts in their business models. In addition, some conflicts that had been identified had not been fully analysed or documented and firms had failed to explain the materiality of the issues or the key mitigating actions they had taken.

The Report also refers in several places to the importance of "discussing" the relevant valuation conflicts. It appears that the FCA may therefore be concerned that some firms are recording the existence of material conflicts in their conflict registers but may not be escalating these issues for appropriate discussion within the appropriate internal body tasked with overseeing the identification and managing of conflicts.

        
        Key actions
    
Ensure that all relevant valuation-related conflicts of interest have been documented in adequate detail and that the central conflicts register has been appropriately updated to reflect this.

Avoid "broad brush", overly generalised descriptions of conflicts.
Ensure that all material actions taken to manage or mitigate conflicts have been properly recorded.

Ensure that material conflicts have been properly discussed at the appropriate governance forum and that evidence of discussions has been retained.

Ensuring functional independence for the valuation process

The FCA has highlighted that independence is a core part of a robust valuation process. The Report highlights several elements that the FCA considers underpin independence in this context, including:

Whether the firm's valuation committee or other valuation function has only an administrative role (for example, in collating valuation information) or leads on making valuation decisions;
The composition of the voting membership of the valuation committee or function, including whether this includes investment professionals undertaking portfolio management activities; and
Whether the members of the valuation committee or function have sufficient expertise to be able to understand and challenge valuation models and inputs appropriately.

The Report suggests that the FCA would prefer firms to operate a separate valuation committee that acts as a dedicated forum to discuss and challenge valuation inputs and methodologies and to lead on valuation decisions. Although the FCA does not expressly prohibit investment professionals who undertake portfolio management from being members of the valuation committee, the tone of the Report nonetheless indicates a significant degree of scepticism about whether such arrangements are compatible with the requirement for independence and proper management of conflicts. However, the FCA does not object to the valuation committee obtaining views from investment professionals, provided that those views are clearly documented and segregated so that the committee can scrutinise and challenge them.

This element of the FCA's feedback may pose potential issues for some firms. The senior investment professionals in many private market firms often occupy the role of owner-managers of the business and may bring both extensive expertise and senior management oversight to the valuation process. If the relevant individuals remain part of the valuation committee, it will be important for the firm to document in detail how the potential conflicts arising from their involvement are addressed, having regard to the concerns outlined by the FCA.

        
        Key actions
    
Ensure that the valuation committee has the necessary authority to lead on valuation decisions.

Review the composition and voting arrangements of the valuation committee to ensure that these are consistent with the requirement for functional independence.

Identify any involvement of investment professionals in the valuation committee. Where investment professionals form part of the voting membership of the committee, ensure that there is a fully documented analysis of how the firm considers that this is consistent with the independence requirement.

Ensure that all valuation committee members have appropriate expertise to be able to understand, scrutinise and challenge valuation inputs, methodologies and decisions.

Incorporating defined processes for ad hoc valuations

The FCA is concerned that "stale" valuations can result in harm to investors through the risk of inaccurate performance information and for open-ended funds or listed funds, through potentially inaccurate subscription, redemption or NAV-influenced trading prices. Although the FCA observed that many firms operate regular (e.g. quarterly) valuation cycles, most of the firms sampled in the Report did not have clear processes for updating asset valuations outside of those cycles in response to material events. The Report notes that in some cases, firms might provide commentary to investors about the impact of a market event but the value of the investor's assets reported by the firm would nonetheless remain unchanged.

The FCA expects firms to consider implementing specific processes for ad hoc valuations, which should include clearly defined triggers for when such a valuation is required. The Report gives the example of triggers based on market events meeting certain defined thresholds, as well as asset-led triggers such as investee company-specific events or significant moves in comparable measures (e.g. the enterprise value of a comparable company). Although this element of the FCA's feedback is flagged as a point to consider, it is notable that the FCA has highlighted this as one of its four key areas in the Report. When considering whether, and if so, how, to implement an ad hoc valuation approach, firms may wish to consider the circumstances in which "stale" valuations could present a material risk of harm in the context of their operating models and focus first on those areas.

In practice, this may be an element that firms could find particularly challenging, given the potentially wide range of events that could affect asset valuations and the complexity and resourcing demands of undertaking valuations of many private market assets outside of the regular cycle. Firms are likely to need to undertake a delicate balancing exercise to ensure that any ad hoc valution procedures appropriately mitigate the risk of any material stale valuations, while avoiding the firm becoming swamped by out-of-cycle valuations if triggers are too sensitive. Firms might also wish to review and refine the relevant triggers over time, documenting the evolution by reference to observed events and the results of any ad hoc valuations that are undertaken.

Key actions

If the firm already has ad hoc valuation procedures, review existing triggers for valuations to ensure that they are appropriately calibrated and that the rationale for each trigger is clearly recorded.
Otherwise, implement procedures for ad hoc valuations containing clearly defined triggers, including the rationale for why each trigger has been chosen.
Keep ad hoc valuation procedures under review to further calibrate triggers over time.

What other points are contained in the Report?

The Report also contains observations in a number of other areas, which we have summarised below:

CONSISTENCY OF VALUATION METHODOLOGIES

The Report highlights the importance of firms applying valuation methodologies and assumptions consistently over time to ensure proper comparability of asset valuations. The FCA indicates that it is good practice to use standardised valuation templates to ensure consistency.
Where firms apply adjustments to methodologies, the FCA is clear that this should be only for the purpose of ensuring that the valuation reflects fair value.
The FCA encourages firms to consider adopting industry guidelines (e.g. the International Private Equity and Venture Capital Valuation Guidelines) to ensure consistency with broader market practice. The Report notes that this could also aid investors' ability to compare valuation information from different firms that are active within the same asset classes.
However, the Report also states that firms should consider adopting secondary methodologies to corroborate their valuation judgements. For example, a firm using a primary methodology of valuing an investment by reference to market-observed measures of the enterprise value of comparable companies might consider using a discounted cash flow methodology as a secondary check on its valuations.

        
        AVOIDING OVERLY CONSERVATIVE VALUE APPROACHES
    
The Report notes that many firms sought to avoid volatility in asset valuations by applying conservative valuation approaches that resulted in an "uptick" to asset valuations at the point of exit.  Firms argued that this limited the risk of overvaluation of assets and therefore was a more risk-averse approach.

The FCA is concerned that use of overly conservative approaches means that investors are not being informed of the true value of investments at any given point in time.  In addition, presenting valuation information in this way may obscure the true level of volatility in asset prices, making it harder for investors to judge the level of risk accurately.

Firms should therefore ensure that the risk of an overly conservative valuation approach is considered by their valuation committees so that investors are receiving accurate valuation information.

        
        BACKTESTING
    
Firms should consider using backtesting to compare the realised value of assets to the firm's previous valuation estimate.  This is designed to help the firm identify limitations to their valuation models and inputs, as well as to understand the potential impact of different market conditions on an asset's value.

        
        MANAGEMENT AND PERFORMANCE FEES
    
Firms calculating management fees (and where relevant, performance fees) on the basis of a fund's NAV should clearly identify and document potential conflicts. This may be most common in relation to open-ended funds, but the Report also highlights that this approach may also be used for some closed-ended funds, such as venture capital trusts.

Although there may be a lower risk of conflict where fees are calculated on the basis of committed capital (as may be common in many closed-ended private equity funds, for example), firms should still consider any potential conflicts if valuation decisions (for example, asset write-downs) may affect management fees.

        
        EMPLOYEE REMUNERATION
    
Firms should identify whether asset valuations that reflect unrealised performance can directly or indirectly affect the remuneration of employees and if so, whether this gives rise to conflicts of interest.  Any identified conflicts should be analysed and recorded alongside any mitigation measures.

Examples could include where individuals are remunerated by reference to changes in the NAV of a fund (where the NAV includes asset valuations incorporating unrealised value) or where the broader perceptions of an individual's performance may be affected by unrealised asset valuations.

        
        ASSET TRANSFERS AND CONTINUATION FUNDS
    
Asset transfers that are priced by reference to internally generated valuations can result in potential conflicts of interest, particularly if carried interest or other performance fees are awarded on the basis of unrealised performance reflected in the valuation.

There is a significant risk of conflicts in connection with the transfer of assets to continuation funds.  The firms sampled in the Report generally pointed to third-party input on the fairness of valuations, as well as the fact that incoming investors would be unlikely to rely on the firm's own valuation, to demonstrate how they were addressing conflicts of interest.

However, the FCA emphasises that where firms are seeking to rely on incoming investors to continuation funds submitting their own bids for assets, the fairness of those arrangements will also depend upon the extent to which those investors have access to appropriate information to be able to form their own valuation opinion.  As a result, firms should review the information they provide to incoming investors for these purposes.

        
        INVESTOR TRANSPARENCY
    
The Report states that firms should review their existing approach to reporting and engaging with investors on asset valuations with a view to increasing transparency.

The FCA indicates that it is good practice for firms to provide quantitative and qualitative information on performance to investors, both at the fund level and at the asset level.  The Report suggests that this could include a "value bridge" that explains the changes in value in an asset since the last report by disclosing how much of the change is attributable to different elements (such as changes connected to a portfolio company's underlying earnings, changes in exchange rates, or changes resulting from particular valuation judgements).

        
        INVESTOR MARKETING / FUNDRAISING
    
Where a firm uses unrealised asset performance in its marketing materials, there is a potential conflict of interest as the firm will be incentivised to show potential investors stable, positive growth in asset values.  The Report notes that few of the sampled firms had adequately identified and documented the potential implications of this conflict.

The FCA indicates that it is good practice for firms to split out realised performance and unrealised performance components in their marketing or fundraising materials.  The unrealised performance information should explain the extent to which it is dependent on the firm's internal valuation process and should also be disaggregated into its constituent elements.

        
        LOAN-TO-VALUE COVENANTS IN SECURED BORROWING ARRANGEMENTS
    
Where borrowing is secured against a portfolio that contains private market assets, the financing agreement may contain loan-to-value (LTV) covenants. The monitoring of ongoing compliance with LTV covenants may rely on the firm's asset valuations and the FCA is therefore concerned that this many give rise to a conflict of interest because firms may be incentivised to inflate asset values.

The FCA's approach in this area is interesting, as for a conflict of interest to arise, there must normally be a conflict between the firm's own interests and a duty it owes to a third party, or a conflict between duties owed by the firm to two or more other parties. It is unclear as to the extent to which the firm would owe a duty to the lender in connection with LTV covenants.  Many firms sampled in the Report pointed out that lenders frequently applied their own detailed scrutiny to asset valuations.

However, it may be that the FCA is concerned that if a firm adopted an inflated valuation for the purposes of complying with an LTV covenant, the same valuation would necessarily be carried over into other contexts – for example, into investor reporting or fee calculations (where relevant). Firms should therefore identify and document potential conflicts that could arise from the use of portfolio financing arrangements and how these are mitigated or managed in practice.

        
        AUDITORS
    
The Report indicates that firms should consider how they can better engage with external auditors to ensure that valuation processes are robust. The FCA suggests that examples of auditor engagement for these purposes could include inviting auditors to observe valuation committee meetings or ensuring that points raised by auditors that are relevant to valuations are specifically discussed by the valuation committee.

The Report also suggests that firms should consider how to manage potential conflicts arising from potential "commercial capture" of auditors – for example, by periodically rotating individual audit partners and audit firms.

        
        THIRD-PARTY VALUERS
    
Firms will be relieved that the Report leaves significant flexibility for firms in relation to the use of third-party valuers and does not expressly require firms to use such services in any particular context.

However, the Report nonetheless states that it is good practice for firms to engage third-party valuers on issues where the firm has identified material conflicts of interest, such as in relation to asset transfers, pricing of redemptions or subscriptions in open-ended funds, or issues involving the calculation of the firm's own fees.

The FCA is clear that the firm retains overall responsibility for valuation decisions and therefore it is important that where the valuation committee uses third-party expertise, it still uses its own judgement to consider the input it receives before reaching a final decision.

The Report also states that firms should consider disclosing to investors their use of third-party valuers, including information about the type of valuation service provided and the strengths and limitations of that service.

As with auditors (see above), firms should also consider how they can ensure the continued independence of any third-party valuers they engage, having regard to the risk of "commercial capture" where the valuer is dependent on fees from the firm.  Firms may wish to consider periodic rotation of third-party valuers to mitigate any potential commercial conflicts.

What are the next steps following the Report?

Firms should now be undertaking a gap analysis of their position against the key points raised in the Report. The FCA has indicated that it will be continuing to engage with firms and industry associations on the observations in the Report and therefore firms will need to be able to demonstrate, if asked, that they have considered and documented the relevant issues. Where firms identify material shortfalls against the FCA's expectations, they should ensure they have a clear plan to address the relevant issues within a reasonable timescale.

More broadly, it is clear that the Report is just one element of wider ongoing FCA work in relation to potential conflicts of interest in private market firms. As a result, firms may also wish to consider reviewing their wider policies and controls relating to conflicts in anticipation of possible future FCA engagement in this area.

The FCA states at the end of the Report that it will use its findings to feed into its review of the onshored UK AIFMD framework. This suggests that any FCA proposals on revising UK AIFMD might include more specific targeted provisions to deal with some of the issues that the FCA has identified, but firms will need to wait to see details of the FCA approach in this area before assessing the possible impact of this.

As the FCA is taking a leading role in reviewing the IOSCO 2013 Principles for the Valuation of Collective Investment Schemes, it also seems likely that some of the FCA's thinking may end up being reflected in revised international standards in this area. UK firms that form part of international groups may therefore wish to consider whether it would be more efficient to conduct a group-wide benchmarking exercise against the key FCA observations in the Report, given this potential direction of travel.

Travers Smith has previously assisted a number of firms in relation to Phase 1 and Phase 2 of the PMVR and has extensive experience in advising firms in relation to the issues raised by the Report. If you would like to discuss the application of any of the observations in the Report to your organisation, please get in touch with your usual Travers Smith contact or any of the individuals named below.

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