FCA to review private company valuations?

October 3, 2023

There has been some interesting news regarding the FCA’s approach to private market valuations in the past few days.

The Financial Times reported last Wednesday that the FCA is “preparing to launch a sweeping review of valuations in private markets” as there are increasing fears that the impact of increasing interest rates has not been fully examined. You can read the full Financial Times article HERE.

This review comes after the International Organisation of Securities Commissions published a recent report highlighting the opaque nature of private asset valuations, the often significant lag in private asset valuations taking place and the inherent vulnerability of private asset valuations due to their illiquidity.

The FCA review is not yet certain, but the article generated 226 comments (not bad for an FT article) with all sorts of views, suggesting that there is interest in the subject.

Our experience of valuing private companies and shareholdings is that each exercise needs to be taken individually. There is no one size fits all in terms of approach.

I attended a seminar held by HMRC Share and Valuations Team in Nottingham last month and they confirmed that they concur with this view.

Given the volumes of private assets, the number of funds, the numbers of portfolio companies and the need for quarterly valuations, a change regulatory approach could have far reaching consequences for all in terms of the resources required to complete them.

Another interesting issue that is worth musing on is whether all VC shareholders in the same portfolio company should use the same valuation (provided by an independent valuer?) rather than the case today where each fund values its own holding in the portfolio company independently.  As you will know this becomes a knotty issue when one fund manager takes over a portfolio from another fund manager and re-values the holdings based on its own policies and procedures.

I think everyone can visualise a world where generative AI is of sufficient reliability and stability that all valuations can automated, but the unique characteristics of different companies suggest this is still some way off and particularly if the valuation is required for HMRC, the Courts or in a sensitive situation regarding more than one party where the valuation could become a bone of contention.

We see valuations, not as an art or a science, but as a mathematical exercise followed by arguments about where the mathematical exercise is failing to recognise what is essentially intangible value.

There are many elements of value or indeed lack of value, which do not appear in the financial statements or forecasts, but which must be assessed to get a realistic price for a company and its shares.  We are repeatedly told that this is one of our USPs.  Indeed a client recently told us: “Your meticulous analysis, though painting a sobering picture, resonates with our understanding, and we find ourselves in agreement with the conclusions you have so adeptly drawn. The nuanced manner in which you’ve incorporated various sentiments to ascertain the intrinsic value of [the company] is particularly commendable and appreciated.”

It’s been interesting for us getting busier and busier (see comment above about volumes of valuations required!) We are on a never-ending mission to streamline our activities so that we keep the highest quality levels, remain fast and produce clearly articulated reports that recognise all the factors and, crucially, are easy to understand.

Interestingly, whilst volumes have more than trebled here, our team has only needed to double because of this approach. However, we are going to need more people soon, especially as there is a lot of demand at the moment for “tricky” and “urgent” valuations.

We will be keeping a close eye on the FCA’s review rumours and let you know if it is announced.

In the meantime, we still have capacity for valuations so if you have one on your desk that is complex, urgent or even just the client needs a report where the underpinning assumptions are explained in plain English, do get in touch.