VC math, or valuations of private firms, has long been more of an art than a science. The friction between investors and firms raising capital is well known. Too low, and money is left on the table. Too high and a future down round, or no round at all, may take place. Of course, a business may simply fail as most private firms do, leaving investors with nothing.
It has been widely reported that the UK Financial Conduct Authority is investigating private market valuations. A review by the regulator was launched last year with insiders anticipating a response from the FCA to be revealed soon.
Myles Milston, co-Founder and CEO of Globacap, a firm that aims to deliver public markets-like efficiency to private markets, believes that accurate valuations are vital to effectuate more efficient transactions. Milston shared his opinion with CI explaining that as private markets grow, the need to verify valuations is becoming a necessity as more retail investors and institutions move into the asset class.
“Private markets valuations and transactions must be backed by solid, transparent and unbiased data. We are wholly supportive of the FCA’s increased scrutiny of private market valuations, as this highlights a key issue that has long held the industry back: the need for greater transparency and standardisation in how private assets are priced,” said Milston. “Differing valuation methods, often determined by the asset managers themselves, cannot be relied upon for accuracy, and can create inconsistencies, particularly in the pricing of illiquid assets and secondary transactions. Without an independent, third-party platform or entity to ensure precise valuations, private assets run the risk of being artificially overpriced, a dangerous proposition as the space grows so rapidly.”
Milston believes that technology is the key to providing accurate and auditable valuations. This includes blockchain-based securities infrastructure, which he believes will make it possible to “embed compliance, price discovery, and reporting into private market workflows, helping to standardise the valuation process independently.”
“As the FCA sharpens its focus on governance, it’s crucial for the industry to take proactive steps to address these concerns, ensuring that valuations are not just robust, but also verifiable, consistent, and fair for all stakeholders.”
The UK is also nearing the launch of PISCES, a new market for private securities, which may be part of the solution. It will also blur the line between public and private securities, but it is something that is being driven by market demand.