Private markets have grown significantly in recent years with the UK continuing to be the largest centre for private market asset management in Europe. Robust valuation practices are essential for fairness and confidence. However, a recent review by the Financial Conduct Authority (FCA) found that valuing the performance of investments is an area ripe for improvement.

Joshua Evans is a senior market analyst at the FCA and led the regulator’s review of private market valuation practices, published in March 2025, which analysed the governance and processes behind valuations at asset management firms. Evans presented a session at ICAEW’s recent Valuations Conference, now available on demand – to offer guidance to firms on this subjective area.

Infrequent trading requires firms to estimate private asset values using judgement-based approaches. This introduces a risk that firms could value private assets wrongly for a host of reasons, including insufficient expertise, a lack of proper focus, or poorly managed conflicts of interest. All of these increase the risk of harm to investors and overall market integrity.

The FCA’s review analysed a cross section of asset classes, business models and firm size to understand market practice. While the study showed a step up in standards since 2018/19, it also highlighted opportunities for further improvements and adds clarity around process expectations.

Nearly all firms reviewed had specific governance arrangements in place for valuations, mostly in the form of a valuation committee. Those with robust governance demonstrated the key principles of clear accountability and oversight of valuation, a strong focus and dedication to perform valuations, and maintaining accurate and detailed record keeping of how valuation decisions are reached.

Identification of potential conflicts of interest

Firms identified conflicts in the valuation process around fees and remuneration and in many cases limited these through fee structures and remuneration policies. However, other potential conflicts including potential valuation-related conflicts related to investor marketing, secured borrowing, asset transfers, redemptions and subscriptions and uplifts and volatility were only partly identified and documented.

“This was probably one of the most important findings, especially given the subjectivity and judgement that's required in private market valuations,” Evans said. “Any potential conflict or bias or incentive to move valuations both up and or down across time is really where harm can come into play. Fundamentally, a conflict cannot be mitigated or managed if it's not identified in the first place."

Independence within a firm's valuation process

To demonstrate independence, the FCA review highlights the value of independent functions that:

• lead on valuations,
• develop valuation models,
• maintain control over input and assumption changes, and
• prepare recommendations, such as to the valuation committee. 

The FCA highlights the importance of independent valuation committee members or voting members with sufficient valuation expertise.

However, the review highlighted a spectrum of approaches, including some where investment professionals had greater involvement. “We think this requires further consideration by firms, particularly taking into account their size and the materiality of any conflicts of interest,” Evans said.

“The processes that did not meet our expectations were those where that independent function lacked any expertise, particularly around valuation assumptions or methodologies and where valuation committee membership had a majority of investment professionals,” he added.

Policies, procedures and documentation

Valuation policies need to be sufficiently comprehensive to ensure consistency in approach by the firm, but also to enable auditors and investors to test that the process is being followed. “We'd love to see some standards raised here, particularly firms who went into detail on the methodologies they used,” Evans said.

Valuation models need to be clear and record rationales for assumption changes, Evans said. In that respect, use of valuation templates provides visibility over the decisions made around assumptions, such as comparable sets, multiples and discount rates.

Ad hoc valuations

The review highlighted a trend towards most firms performing quarterly valuations. However, the FCA said it was surprised that most firms did not have a formal process in place for conducting ad hoc valuations, meaning that changes during significant market events would only flow through at the next valuation cycle, leading to a risk of stale valuations.

“If something market specific or asset specific happens, we very much think that there is scope for firms to introduce a process to mitigate that risk,” Evans said. Firms with formal ad hoc processes within the review documented the types of events that would trigger an ad hoc valuation.

The application of valuation methodologies

The methodologies used were mostly consistent by asset class. However, we did observe different methodologies for private equity, where some firms said they only used the market approach, while a few firms primarily relied on the income approach. “These observations do fundamentally raise questions around the ability of investors to compare valuations across firms,” Evans said.

The emphasis must be on consistency of approach, Evans said. “So that when you are changing a methodology or assumption, there is a very clear rationale as to why you are doing so. We've also called out the use of secondary methodology to corroborate your judgement when valuing an asset as a positive part of a valuation process.”

Third-party valuation advisors

Third-party valuation advisors can provide additional independence and expertise, but their value as an additional control will depend on how firms use and engage with these providers.

Evans concluded: “Our view is that firms should consider the strengths and limitations of the service provided and also consider disclosing the nature of the services used by investors, for example, on portfolio coverage and frequency, because the strength of that service does depend on those factors.”