March 2025
The FCA has published the findings of its review on private asset managers’ valuation processes and governance arrangements.
Overall, several instances of good practice are identified and the findings are broadly encouraging for firms. However, the FCA expects improvements in several areas.
This article summarises the key findings and next steps for firms.
The wider context for the FCA’s valuation review
The FCA’s valuation findings come hot on the heels of its latest portfolio letter for asset managers and alternatives firms. This letter previewed the findings and signposted a new supervisory review by the FCA this year on conflicts of interest at firms managing private assets. Additionally, it mentioned the increasing democratisation of private asset products and noted that the FCA will be supervising closely the more important guardrails in this context, such as the robustness of firms’ product development frameworks.
This publication comes at a critical tipping point for the government’s growth and competitiveness agenda (you can read some analysis on this here) and at a time of significant growth of the private assets industry – particularly in private credit.
While the FCA recognises the positives of the growth of the industry it’s clear that – in alignment with IOSCO’s priorities at global level – it expects to carry out plenty more supervisory work with this part of the industry.
More generally, private asset managers will need to continue to respond to regulatory change. For EU fund managers, it is now only a year until the substantial AIFMD II package is implemented in April 2026. Conversely, UK fund managers can expect some streamlining of the UK AIFMD requirements – more information should emerge on that shortly.
In the meantime, there is plenty to be done in terms of responding to the FCA’s valuation review findings.
“Robust valuation processes were those that could evidence independence, expertise, transparency and consistency.”
- FCA – Private market valuation practices – March 2025
The FCA’s findings on valuation
The FCA’s detailed findings are helpful for understanding specific areas where improvements are required.
Governance arrangements
The FCA found that committees dedicated to making valuation decisions tend to demonstrate greater independence and oversight of the valuation process. It sees a need for improved accountability for the valuation process and corresponding oversight, and more detailed record-keeping around how decisions are reached.
Firms should review their governance arrangements and make enhancements where needed. This should include ensuring that valuation committee papers clearly articulate any points of uncertainty, and that meeting minutes clearly reflect substantive points of challenge and discussion.
Firms will also need to ensure their risk management frameworks remain valid and appropriate as their business grows, and regulatory scrutiny increases.
Conflicts of interest
This is the longest section of the FCA’s report and covers a wide range of different sources of valuation-related conflicts and circumstances where they might arise. The FCA’s main concern is that firms have not identified and mitigated conflicts beyond those that relate to fees and remuneration – it expects them to identify and document all potential valuation-related conflicts, their materiality, and actions to mitigate or manage them.
Examples of actions for firms include:
- Documenting how valuation-related fee conflicts vary across the firm’s different products
- Considering additional controls for asset transfers – e.g. use of a third party valuation
- Separating unrealised and realised investment performance in marketing materials
- Reviewing the appropriateness of valuation-related remuneration incentives
Firms should also consider how they assess the materiality of conflicts and ensure there is a consistent methodology for doing so.
Functional independence and expertise
Where firms perform valuations themselves, they need to ensure portfolio management and valuations are functionally separate. While the investment team’s views may be sought and considered, an independent valuation capability needs to be able to demonstrate ownership of the process and methodology.
The FCA sees room for improvement where the valuation function has more of an administrative or operational role with only limited ability to challenge inputs or assumptions. It will follow up with firms where senior investment professionals have a role as voting members on valuation committees, or the committee has insufficient expertise.
Firms should review the balance of their committee and ensure there is an appropriate combination of expertise and independence.
Policies, procedures and documentation
Some firms need to enhance the completeness of their valuation policies – for example, clearly articulating the selection of methodologies, their limitations, and the required inputs and data sources. Some policies also need to be expanded to capture the requirements for a periodic review, the consistent application of valuation policies, and procedures for escalation measures.
Firms should review how the policy aligns with the specific requirements in the UK AIFMD Level 2 Regulation.
Documentation of models could also be improved in some cases – for example, in some cases firms’ recorded rationales for changes in key assumptions were vague. The FCA also emphasises the importance of backtesting to assess the accuracy and precisions of their valuation approach and to inform adjustments needed.
Frequency of valuation
The majority of firms are using a quarterly valuation cycle for most assets (apart from debt assets where firms also deploy monthly valuation cycles).
The FCA found that only a minority of firms have defined thresholds for triggering ad-hoc valuations or a formal process for conducting these valuations and incorporating them in the valuation process. It expects firms to incorporate formal, defined processes for ad hoc valuations.
Transparency to investors
Reporting and disclosure to investors varied across firms. The FCA expects regular quantitative and qualitative information on performance at fund- and asset-level to be disclosed, alongside regular conference calls with investors.
Overall, the FCA wants firms to consider where they can improve their engagement with investors on valuation, for example by reporting to investors the different components to changes in the value of their assets.
Valuation methodologies
Fund managers need to apply the designated valuation methodologies consistently, considering investment strategies and asset types.
The FCA’s feedback on the different methodologies commonly applied by asset class should be useful for firms to help benchmark themselves. The key for the FCA is that methodologies should be applied consistently and valuation adjustments only made on the basis of fair value – with appropriate oversight from valuation committees and independent functions on these adjustments.
Third party valuation advisers
The FCA acknowledges the potential benefits associated with third party valuers but also notes firms need to be aware of potential conflicts that might arise from using them.
It wants firms to consider the strengths and limitations of the third-party service providers and disclose the nature of the services used to investors, including portfolio coverage and frequency.
Next steps
Private asset managers tend to manage or specialise in a wide variety of private asset classes in practice, ranging from infrastructure equity to private credit and beyond. They now need to carefully consider the FCA’s findings and their applicability and relevance to their business and asset classes managed.
Firms should carry out a detailed gap analysis against the FCA’s findings, make relevant enhancements, and have this internal assessment reviewed and approved by relevant governing committees including the board. Specific focus points of this review should include:
- Assessing the adequacy of the valuation policy against relevant requirements (see below)
- Testing the consistency of the application of valuation methodologies – including sampling recent valuations
- Reviewing examples of how conflicts have been identified, assessed and managed, as well as where potential conflicts have been missed
- Testing the effectiveness of the valuation committee – with reference to committee papers, minutes, and the overall composition of its members.
This is also a good time to revisit compliance with the specific regulatory requirements on valuation in Articles 67-74 of the UK AIFMD Level 2 Regulation and FUND 3.9 – and to perform a line by line gap analysis to test alignment and where enhancements may be needed.
These actions can provide some comfort that the FCA’s expectations are being met, including on the areas where the FCA has stated it plans to conduct targeted follow-up work.
You can read more on the evolving regulatory approach to private assets more generally in KPMG in the UK’s series on this topic.
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