FCA review into valuations has started…

July 2, 2024

Last autumn we warned you this might happen….

We now have confirmation from two sources that the FCA review into valuations has started.  FYI the VCT industry is an area where it is focusing.

The results are going to prompt a lot of conversations around the methodologies, approach and regularity of valuations for LPs or shareholders.

It is also going to prompt a lot of discussion about the role independent valuers could and should play.  If we go the way of the US, (at least 500 independent valuation firms who are the go-to place to get a company valuation, not an accountant!), we could eventually come to a position whereby all funds and their ilk will need to hire a valuer who is both independent of the auditor and the fund manager/company at least to double check the valuations of portfolio companies.  They may even be mandated to prepare the valuations.

The LPs in the fund or the non-executive directors will have to hire the independent valuer to ensure neutrality.

I am not ashamed to say that in our experience reaching this place would be a very good thing.  It will have a positive impact on the risks around valuations.

We spend a lot of time considering what we call Investor Hope Premium in valuations.  By Investor Hope Premium we mean the delta between what VCs and others are prepared to invest in the growth plan for a business, versus the valuation which might be determined by a trade sale or sale of a minority interest in a secondary transaction. This is a key issue.  Would you like to discuss how we argue why both approaches can be correct at the same time? If so do call.

I know it was published a couple of weeks ago but I wanted to draw your attention to this article:
Private markets myth-busting 1: Valuing private businesses (citywire.com)

This is a key paragraph in the article, which was part of a series sponsored by Schroders and ultimately to promote its LTAF.

“In the absence of an open market, valuations can’t always be proven to be exact. However, PE providers argue that these methods, based on the fundamentals of a company and used in accordance with rigorous accounting standards, give an accurate picture. They also note that public equity prices are often not efficient, because they are driven by investor sentiment as well as fundamentals.”

Creating “fair market” value is not as obvious as you might think especially if you are thinking about creating a price which is arms’ length and open market.

It is interesting that Schroders has built up its in-house valuations team in the meantime. This does suggest that it feels the need to have the information to challenge fund managers if necessary.

We will keep you updated with news on this issue. It is obviously a topic close to our hearts as the outcomes will determine that nature of the UK valuations industry for many years to come.

In the meantime, we are open for business.

We keep being instructed to prepare valuations for many different scenarios, but the common theme tends to be that the valuations are needed soon and that they are potentially tricky.