Private Markets Valuation: FCA Findings and Compliance Expectations

The growth of private markets has been one of the defining trends in asset management over the past decade. With assets under management in private equity, private credit, real estate, and infrastructure funds reaching unprecedented levels, the Financial Conduct Authority has turned its supervisory attention to the valuation practices underpinning this sector. In March 2025, the FCA published its multi-firm review into private asset valuation, revealing significant concerns about conflicts of interest management and independence in the valuation process.

For firms operating in this space, the findings demand immediate attention. The asset management sector has been confirmed as a key supervisory priority for 2026, and the regulator has made clear that follow-up work with outlier firms is already underway. This article examines the FCA's key findings, explains the regulatory expectations, and provides practical guidance for firms seeking to strengthen their valuation governance and conflicts management.

Why Private Markets Valuation Matters

Unlike publicly traded securities with readily observable market prices, private assets present fundamental valuation challenges. There is no liquid market generating continuous price discovery, and the characteristics of each investment—whether a portfolio company, a commercial property, or an infrastructure project—are unique. Valuations therefore require significant judgement, often relying on models, assumptions, and comparable transactions that may be months or even years old.

This inherent subjectivity creates fertile ground for conflicts of interest. When the same individuals responsible for investment performance are also involved in determining valuations, the potential for bias—whether conscious or unconscious—is significant. Overstated valuations can inflate management fees, enhance track records used in fundraising, and delay recognition of impairments that might trigger investor redemptions or breach fund covenants.

The consequences of poor valuation practices extend beyond individual investor harm. Systemic overvaluation could mask underlying weakness in private market portfolios, creating risks for pension funds, insurers, and other institutional investors with substantial private market allocations. The FCA's focus on this area reflects broader concerns about financial stability as well as individual investor protection.

Key Findings from the FCA Multi-Firm Review

The March 2025 multi-firm review examined valuation practices across a sample of asset managers operating in private markets. The findings highlighted both areas of good practice and significant concerns requiring remediation.

Conflicts of Interest: A Pervasive Challenge

The FCA identified conflicts of interest as the most significant area of concern. Specifically, the regulator found that many firms had not adequately identified, documented, or mitigated the conflicts inherent in private asset valuation.

Fee-Related Conflicts

Management fees in private markets are typically calculated as a percentage of net asset value (NAV). This creates an obvious conflict: higher valuations mean higher fees. The FCA found instances where:

Fee structures created incentives to maintain or increase valuations regardless of underlying asset performance
Firms had not documented how they mitigated the fee-related conflict in their valuation processes
Valuation committees included individuals with direct responsibility for revenue generation

Transfer Pricing Conflicts

When assets are transferred between funds managed by the same firm—for example, from an open-ended fund to a closed-ended successor vehicle, or between vintage funds—the valuation directly affects which investor group benefits. The FCA identified cases where:

Transfer pricing relied on internal valuations without adequate independent verification
The same individuals were involved in both the transfer decision and the valuation
Documentation did not adequately explain how conflicts were managed

Redemption-Related Conflicts

In open-ended funds investing in illiquid private assets, valuations directly affect redemption prices. Investors redeeming at overstated valuations receive more than their fair share of fund value, harming remaining investors. Conversely, understated valuations harm redeeming investors. The FCA found:

Insufficient consideration of how valuation timing affected different investor groups
Limited analysis of whether valuations appropriately reflected illiquidity in redemption scenarios
Inadequate disclosure to investors about valuation uncertainty and its implications for redemptions

Marketing and Performance Conflicts

Valuations feed directly into track records used to market funds to prospective investors. The FCA expressed concern about:

Pressure on valuation functions from distribution teams seeking favourable performance figures
Insufficient independence between marketing materials preparation and valuation processes
Limited disclosure about the uncertainty inherent in unrealised performance figures

Independence and Governance Deficiencies

Beyond specific conflict categories, the FCA identified structural weaknesses in how firms organised their valuation functions.

Lack of Functional Independence

Best practice requires meaningful separation between those making investment decisions and those determining valuations. The FCA found that many firms fell short of this standard:

Valuation committees were chaired by or dominated by investment professionals
Independent members lacked the expertise or authority to challenge valuations effectively
Reporting lines created implicit pressure on valuation functions to support investment teams

Inadequate Challenge and Escalation

Effective governance requires robust challenge of proposed valuations, particularly where significant judgement is involved. The review found:

Valuation committee minutes showed limited evidence of substantive challenge
Escalation procedures were unclear or rarely invoked
Threshold criteria for triggering enhanced scrutiny were absent or ineffective

Third-Party Valuation Limitations

Many firms use external valuers to provide independent input. However, the FCA found that external involvement did not always deliver genuine independence:

External valuers were provided with limited information, constraining their ability to form independent views
Firms selected external valuers based on expected outcomes rather than expertise
External valuations were routinely overridden without adequate documented justification

Regulatory Expectations: What Good Looks Like

The multi-firm review was accompanied by clear articulation of FCA expectations. Firms should benchmark their arrangements against these standards.

Comprehensive Conflict Identification

The FCA expects firms to maintain a comprehensive register of conflicts of interest relating to valuation, updated regularly and reviewed at board level. This should cover:

Fee-related conflicts affecting all relevant fund structures
Conflicts arising from staff remuneration linked to fund performance or AUM
Transfer and allocation conflicts where the firm manages multiple vehicles
Conflicts affecting different investor classes within the same fund
Marketing and distribution conflicts

Each identified conflict should be accompanied by documented mitigation measures and an assessment of residual risk.

Structural Independence

Valuation functions should have genuine independence from investment decision-makers:

Valuation committees should include independent members with relevant expertise
The committee chair should not have primary responsibility for investment performance
Reporting lines should ensure the valuation function can escalate concerns without fear of retaliation
Remuneration for valuation personnel should not be directly linked to AUM or investment performance

Robust Documentation and Assessment

Every valuation should be supported by documentation sufficient to enable reconstruction of the decision-making process:

Key assumptions should be explicitly stated and justified
Sensitivity analysis should demonstrate how valuations would change under alternative assumptions
Comparable transactions should be documented with clear rationale for selection
Deviations from external valuations or model outputs should be explained and approved at appropriate levels

NAV Pricing in Open-Ended Funds

For funds offering periodic dealing, the FCA has specific expectations:

Valuations should be conducted with sufficient frequency to reflect material changes in asset values
Dealing prices should appropriately reflect the costs and uncertainty of realising illiquid assets
Swing pricing or similar mechanisms should be considered to protect non-transacting investors
Investors should receive clear disclosure about valuation frequency, methodology, and uncertainty

Ongoing Monitoring and Reporting

Boards and senior management should receive regular reporting on valuation matters:

Trend analysis showing valuation movements and their drivers
Comparison of realised values to carrying values at sale
Summary of valuation challenges and how they were resolved
Assessment of whether conflicts have been effectively managed

Practical Steps for Compliance

Based on the FCA's findings and expectations, firms should consider the following practical steps to strengthen their valuation governance.

Conduct a Conflicts Mapping Exercise

Undertake a comprehensive review of all conflicts affecting your valuation process. For each conflict:

Document the nature and source of the conflict
Assess the potential magnitude of harm if the conflict is not effectively managed
Evaluate existing mitigations and identify gaps
Implement additional controls where residual risk is unacceptable

This exercise should involve compliance, risk, and legal functions, with findings reported to the board.

Review Valuation Committee Composition

Assess whether your valuation committee has genuine independence:

Consider adding independent non-executive members with relevant valuation expertise
Review whether the chair has conflicts that could compromise independence
Ensure investment professionals do not dominate committee membership
Evaluate whether committee members have sufficient authority to challenge valuations

Strengthen External Valuer Engagement

If you use external valuers, review the effectiveness of this arrangement:

Ensure external valuers receive comprehensive information to form independent views
Document the rationale for selecting specific valuers
Establish clear protocols for engaging with external valuations
Require detailed justification and escalation where internal valuations deviate from external assessments

Enhance Documentation Standards

Implement documentation standards that enable regulatory scrutiny:

Create templates capturing key assumptions, comparables, and sensitivity analysis
Require explicit sign-off on all significant judgements
Maintain audit trails showing how valuations evolved through the review process
Document all challenges raised and how they were resolved

Review Open-Ended Fund Mechanisms

For funds offering dealing in illiquid assets:

Assess whether current valuation frequency is sufficient
Consider whether swing pricing or anti-dilution mechanisms are appropriate
Review investor disclosure about valuation methodology and uncertainty
Evaluate whether redemption terms remain appropriate given liquidity characteristics

Prepare for Regulatory Engagement

The FCA has indicated it will conduct follow-up work with outlier firms. Prepare for potential engagement:

Ensure key documentation is readily accessible and clearly organised
Brief relevant personnel on regulatory expectations
Identify and address obvious gaps before they are found
Consider whether independent review would identify issues that internal assessment has missed

Investor Protection: The Underlying Imperative

Throughout its review, the FCA emphasised that valuation governance is fundamentally about investor protection. Private market investors—whether pension funds, insurers, wealth managers, or increasingly retail investors through Long-Term Asset Funds (LTAFs)—depend on valuations to:

Monitor the performance of their investments
Make informed decisions about portfolio allocation
Meet their own reporting and regulatory obligations
Plan for future liquidity needs

When valuations are unreliable, investors cannot make informed decisions. When conflicts are poorly managed, investor interests may be subordinated to manager interests. The Consumer Duty, now fully embedded in FCA supervision, reinforces the expectation that firms must act to deliver good outcomes for investors—and accurate, unbiased valuations are foundational to this obligation.

Looking Ahead: Supervisory Priorities for 2026

The FCA has confirmed that asset management supervision, including private markets valuation, will remain a priority through 2026. Firms should expect:

Further thematic work examining how the sector has responded to the multi-firm review findings
Increased data requests seeking valuation-related management information
Supervisory focus on firms that were identified as outliers in the original review
Potential enforcement action where significant failures are identified

The regulatory direction is clear: the FCA expects meaningful improvement in valuation governance across the sector. Firms that act now to strengthen their arrangements will be better positioned to demonstrate compliance and maintain regulatory confidence.

How MEMA Can Help

Navigating the complexities of private markets valuation governance requires specialist expertise that bridges regulatory requirements with operational realities. MEMA Consultants has extensive experience supporting asset managers in this area.

Our services include:

Conflicts of Interest Review We conduct comprehensive assessments of conflicts affecting your valuation process, identifying gaps and recommending practical mitigations that satisfy regulatory expectations.

Valuation Governance Framework Design We help firms design and implement valuation governance frameworks that provide genuine independence, robust challenge, and clear documentation.

Policy and Procedure Development We draft valuation policies and procedures tailored to your business model, ensuring they meet regulatory expectations whilst remaining operationally practical.

Committee Effectiveness Assessment We review valuation committee composition, terms of reference, and operating practices, recommending enhancements to improve effectiveness.

Regulatory Readiness Reviews We conduct mock regulatory reviews simulating FCA scrutiny of your valuation arrangements, identifying issues before they attract supervisory attention.

Training Programmes We deliver targeted training for valuation committee members, compliance teams, and investment professionals on regulatory expectations and best practices.

Our team includes former FCA supervisors with direct experience of asset management supervision and consultants who have supported firms across the private markets sector in strengthening their valuation governance.

Contact us today for a confidential discussion about how we can support your firm in meeting FCA expectations for private markets valuation.

About the Author

The MEMA Regulatory Team comprises former FCA supervisors and experienced compliance consultants with deep expertise in asset management regulation, including specialist knowledge of private markets supervision and conflicts of interest management.

This article is for general guidance only and does not constitute legal or regulatory advice. Firms should seek independent professional advice tailored to their specific circumstances.