FCA investigation into private company valuations now well underway
November 26, 2024
Private Equity News reports that its sister title has seen the FCA’s survey
It was interesting to learn in a Private Equity News story on 12th November that the FCA is taking aim at governance around valuations as much as the methodologies used to create the valuations.
Apparently the questions cover, inter alia,
- How frequently assets are valued?
- Whether every valuation is done in full? (that’s a good one!)
- How ad hoc valuations are triggered?
- How much firms have invested across a host of asset classes? (interestingly VC sits alongside infrastructure and real estate).
- Has the firm taken credit against the market value of holdings in a fund – so-called NAV financing – and whether this was to finance investment in the portfolio or to facilitate payouts to investors?
- Have they launched any continuation funds holding private assets in the past three years, and if so, why? Have there been any other private assets transferred between funds or other group entities?
- What exits from investments have been achieved and how (e.g. initial public offerings and private sales of assets)?
According to Private Equity News, the FCA has stated that “Private markets could prove vital in improving returns to savers, but the extent of potential interconnections with the real economy and opaque valuation methodologies would require more investigation.”
The results and findings of this investigation will be fascinating in their own right, regardless of the decisions the FCA makes about whether there need to be changes in approach in respect of how valuations are prepared and reported.
Of course, this FCA issue may have a significant impact on the pressure to encourage pension funds to invest greater amounts in the UK (which many are taking to mean investing in VC and PE funds, as well as infrastructure).
In our opinion, the FCA research and decisions will be critical to a greater understanding of how investing can happen into private companies. We have some secondary market activity in private company stocks (I am a fan of Asset Match, it being where I was a NED for nine years, but also JP Jenkins and Aquis). The new PISCES market recently launched by the London Stock Exchange may become interesting from a data perspective too, but for comparable multiples we are still often reliant on partial or possibly long out-of-date transaction data or on a limited number of comparable quoted companies.
Were the FCA to start mandating who should prepare valuations and how, it could cause major changes in the investment industry with an obvious knock-on effect for valuations in other circumstances such as those involving the UK and international tax authorities. You can see why we take such an interest in the topic even though preparing valuations in most scenarios is not a regulated activity.
If you are interested in what we think the outcomes of the FCA investigation might be, or if you have your own views to share, do get in touch.
