Ensuring independence in valuation: FCA's recommendations for alternative asset classes

8 May 2025

In March 2025, the Financial Conduct Authority (FCA) published the findings of its Private Markets Valuation Review which assessed valuation practices across a selection of firms managing alternative asset classes including private equity, private credit, venture capital and infrastructure.

The FCA emphasises that Independence is a core component of a robust valuation process.

Alternative asset classes such as private equity, private credit, venture capital and infrastructure are typically hard to value and require significant expertise and application of judgment. When performed in-house by the asset manager, insufficient expertise and internal conflicts of interest can lead to inappropriate and biased valuations. Independent valuation advice helps mitigate this risk and the FCA recommends the use of third-party valuers as good practice to manage conflicts of interest.

In-house valuations can create conflicts of interest

The FCA is concerned that internally prepared valuations can create conflicts of interest that are difficult to manage and lead to a valuation bias. Using independent valuers not only aligns with regulatory expectations but also enhances investor confidence in reported valuations. According to the FCA, conflicts of interests can arise in areas such as:

Fees – Conflicts can arise when fees paid by investors are linked to valuations, particularly for open-ended funds and closed-ended investment companies where fees are typically linked to NAV.
Asset transfers – Conflicts of interest in the valuation process will often be present where assets are transferred, for example into continuation funds, where the manager’s valuation determines the transfer price between buyers and sellers (and the interests of the remaining investors).
Conservative valuations – Firms can exercise a preference for ‘conservative’ or ‘prudent’ valuations and a steady valuation profile over time (e.g. avoiding volatility between valuation periods) to demonstrate predictability of returns. While conservative valuations may limit the risk of overvaluation over time, exaggerating the stability of valuations is a form of bias which can also harm investors by obscuring the true level of investment risk.
Redemptions and subscriptions – Conservative valuations can also exacerbate the conflict of interest between outgoing and incoming investors. With periodic and judgement-based valuations there is greater potential for conflicts between new, exiting and remaining investors, who could be transacting at prices that do not always reflect the fair value of their investments.
Fundraising – Using unrealised performance in marketing can create an incentive to present favourable valuations when valuing private assets, especially when firms are fundraising and do not have a significant track record of realised performance

How can you ensure you meet increasing investor and regulatory expectations?

To ensure you are compliant with the latest guidance, we recommend:

Regular portfolio valuations under IFRS13, including compliance with IPEV guidelines.
Ad hoc valuations made outside the regular valuation schedule, to reflect turbulent market movements such as during COVID-19, announcement of US tariffs, global energy crises, etc. This could include a review of the frequency of the portfolio valuations to reflect the significance of these events on the fundamental valuation metrics of the portfolio.
Quality control of existing valuation providers – to maintain confidence in your valuation provider, we advise obtaining periodic alternative valuations of the same assets to help you assess the quality of their valuation

The FCA's increased scrutiny on the valuation of private assets highlights the importance of independence and expertise in the valuation process.

By adopting best practices such as using third-party valuers and adhering to established guidelines, asset managers can mitigate conflicts of interest and ensure more accurate and unbiased valuations. This proactive approach not only aligns with regulatory expectations but also enhances investor confidence and trust in the asset management industry.