Private Market Valuation Practices Under Scrutiny: UK and EU regulators Tighten the Reins

Private markets have grown significantly in recent years with the UK continuing to be the largest centre for private market asset management in Europe. In recent developments, financial regulators in the UK and EU have intensified their oversight of private market valuation practices, aiming to enhance transparency and protect investors against potential conflicts of interest.

FCA's call for enhanced valuation practices

In a letter published on 26 February 2025 aimed at senior executives of asset management firms, the FCA warned firms against the current risks in the private market valuations and that "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 value private assets inappropriately, for example through poorly managed conflicts of interest or insufficient expertise." The FCA published its findings on a multi-firm review of valuation practices for private assets on 5 March 2025. The review has raised concerns regarding potential conflicts of interest in the valuation of private market assets. The comprehensive review of 36 firms managing a total of £3 trillion globally confirmed that managers generally demonstrate good practices in firms' valuations processes, documenting valuations, using third-party valuation advisers and investor reporting but also identified deficiencies particularly in identifying and documenting conflicts, especially where fees are linked to asset values. The regulator also highlighted issues with the use of unrealised performance figures in marketing materials, which could incentivise favourable valuations during fundraising periods. The FCA expects firms to consider the findings, identify potential issues and put in place robust practices to address these issues and, in particular, ensure functional independence for their valuation process.

EU's Initiative to revise valuation guidelines

Similar trends supporting the need for a review of valuation procedures in private markets have developed in the EU. In Luxembourg, for example, the CSSF has announced plans to revise its valuation guidelines for investment funds managers by 2025 following the launch of a common supervisory action on valuation of undertakings for collective investment in transferable securities and open-ended alternative investment funds by the European Securities and Markets Authority in January 2022. The aim of the common supervisory action was to investigate whether authorised managers of UCITS and open-ended AIFs comply with the organisational requirements set out in the Alternative Investment Funds Managers Directive and UCITS frameworks and whether they adhere to valuation principles and methodologies ensuring a true and fair valuation of the assets they manage both under normal and stressed market conditions. The results showed similar positive trends and vulnerabilities to the ones recently identified by the FCA. CSSF Circular 24/856 on the protection of investors in case of an NAV calculation error, an instance of non-compliance with the investment rules and other errors at UCI level, which came into force on 1 January 2025, is one of the measures introduced in Luxembourg to help bolster the reliability and transparency of valuation practices across Luxembourg's investment fund industry. The Circular recognises that NAV calculation is not an exact science and requires approximations, but it aims to establish general principles of checks and balances to ensure proper policies and procedures are in place. The Circular also anticipates that NAV calculation errors may occur and sets out tolerance thresholds for different types of funds and various investment strategies accounting for the fact that the value of certain assets (usually illiquid) can be difficult to approximate. The CSSF must only be notified of NAV calculations errors if these exceed the relevant tolerance thresholds.

Implications for the private market: Next Steps

The intensified scrutiny by both the FCA and CSSF underscores a broader regulatory focus on the rapidly growing private markets sector. As more retail and institutional investors venture into private markets, amid fear of increasingly overvalued public markets, ensuring accurate independent valuations becomes even more crucial. Ultimately, these regulatory measures aim to enhance market integrity, protect investors and maintain confidence in the financial system. As an asset manager it will be important to consider (i) the current valuations procedures in place for each fund under management and (ii) the new legislation and guidance affecting such procedures. Firms must adopt a proactive approach in identifying risks and actual or potential conflicts of interest and finding solutions to ensure valuation procedures are as fair and accurate as possible.