bfinance: Valuation risk in private markets calls for stronger governance
The UK’s Financial Conduct Authority (FCA) recently published its findings from a multi-firm review into valuation practices across private markets. With institutional capital increasingly flowing into private equity, infrastructure, and private credit, the review draws attention to governance shortcomings in the valuation of illiquid assets. According to Matthew Siddick of consultancy firm bfinance, the FCA’s conclusions highlight operational risks that institutional investors should not ignore.
“Unlike public market assets, private investments require considerable estimation and judgement,” he notes. Siddick emphasises that the lack of standardisation across strategies can complicate due diligence and make investor outcomes more vulnerable to subjectivity.
He points out that while external valuation agents are common in real estate portfolios - particularly open-end funds - this is far from standard practice in other segments of private markets. “There’s wide variation in how valuations are produced and governed, and that inconsistency is a material challenge for asset owners,” Siddick says.
Governance, he argues, is key. The FCA stresses the need for a transparent valuation process, often led by a valuation committee. Siddick agrees, noting that committees should be independent of investment teams and include senior operational staff such as CFOs or risk officers. Under European regulation (AIFMD), the Alternative Investment Fund Manager (AIFM) holds ultimate responsibility, even when tasks are delegated.
Siddick also underlines the importance of a comprehensive, documented valuation policy. “This should clearly define methodologies, sources of data, frequency of updates, and procedures for exceptional circumstances,” he explains. Without such policies, investors lack the transparency required to assess how valuations are formed.
He further draws attention to potential conflicts of interest. “Valuation influences fees and fund flows, especially in open-ended funds, so it’s vital to understand how independent valuers are used, and whether controls are robust.” Recent developments like GP-led secondaries and continuation funds, where managers sell assets to themselves, add further complexity.
As Siddick concludes, “Given the stakes, valuation oversight should be a top priority in operational due diligence. The right questions and the right documentation are crucial to protecting investors’ interests.”