Client Alert: FCA Private Market Valuations Review 2024

The FCA has launched its long-awaited review of private market valuation practices which was earlier formally announced in the FCA’s Asset Management and Alternatives portfolio letter issued in March 2024. The FCA states that the objective of this multi-firm review is to understand the quality and robustness of private market valuation practices, the integrity of the valuation process and whether decisions are well evidenced and justifiable.

The first tranche of alternative asset managers selected for this review have been notified of an upcoming information request in July 2024 – with the review consisting of three phases:

It is Kroll’s understanding that Phase 1 will include approximately 20 firms with Phase 2 reducing by approximately half. Firms selected for Phase 2 will be notified as soon as possible resulting in a final number of visits consistent with previous FCA multi-firm reviews.

Phase 2 visits will primarily focus on better understanding of existing valuation practices at firms. Kroll’s opinion is that this will depend on the appropriateness of governance and committee structures, use of third-party service providers and conflict management practices. Firms will be expected to provide evidence to support any claims they make regarding their valuation practices.

Phase 3 will see the FCA communicate outcomes and feedback to the sector, with specific feedback only provided to firms selected for assessment in Phase 2.

In a speech delivered in May, Ashley Alder, the Chair of the UK FCA, provided guidance on the regulator’s specific focus related to this review.

"Harms can occur due to inherent conflicts, with the potential for incentives to adversely affect approaches to valuations….. While values are ultimately crystallized on exit, there is the potential for inflated values to support borrowing, avoid covenant breaches and support fund performance and therefore fundraising. Where liquidity is provided to investors this can also result in unfair redemption prices……These risks cut across all FCA objectives, and it is for this reason we are undertaking domestic supervisory work in relation to valuations."

Considering this review all firms should be prepared to justify their approach to valuations, ensure an appropriate degree of oversight and independence to any decisions being made and, critically, be able to evidence any claims being made in investor disclosures and fund documents.

Kroll’s award-winning Compliance and Regulatory Consulting practice can help your firm meet regulatory requirements and expectations while maintaining its unique compliance program. As a leading global valuation services provider, Kroll offers a unique perspective on valuations, due diligence and regulatory compliance. If you require any assistance with any of the items mentioned above or would like to learn more about how Kroll can support you, please reach out to your usual contact at Kroll or any of the contacts listed below.