Valuation Pressures in Luxembourg’s Private Markets

Valuation in Luxembourg’s private markets is entering a period of profound change. Regulatory reform and increasing portfolio complexity have elevated transparency and accountability from aspirational principles to fundamental requirements. Far from simply adjusting the rules, the Corporate Sustainability Directive and a suite of EU-driven reforms have redefined how value, governance and transparency are interpreted and applied across the industry.

The traditional, somewhat linear approach to fund valuation has been rendered obsolete by the proliferation of alternative assets. Portfolios are now constructed with a far greater degree of complexity, incorporating private debt, infrastructure, private equity, and structured derivatives. These asset classes, while attractive for their potential returns, introduce significant challenges. Illiquidity and the absence of regular market pricing mean that legacy valuation methods, such as straightforward market comparisons or peer benchmarks, are no longer sufficient to satisfy regulatory scrutiny. Supervisory authorities now insist on valuation processes that are not only transparent and analytically rigorous but also fully traceable and, ideally, independently validated.

The credibility of Net Asset Value has never been under greater pressure. The current environment of higher discount rates is compressing valuations, particularly for strategies that are asset-heavy and long in duration, such as infrastructure and real estate. These sectors are acutely sensitive to interest rate movements, and the impact of refinancing costs on portfolio company earnings is becoming more pronounced. Compounding these pressures, thin transaction volumes make it increasingly difficult to source reliable comparables, while infrequent appraisals risk producing valuations that diverge from secondary market pricing. In Luxembourg’s evergreen or hybrid fund structures, redemption demands can clash with valuation lags, creating a scenario where both investors and regulators are demanding a new level of rigour and responsiveness.

Luxembourg’s prominence as Europe’s leading domicile for private debt and alternative fund structures means that the stakes are particularly high. Regulatory bodies such as ESMA and the CSSF have made it abundantly clear that valuation is no longer a back-office technicality. It has become a frontline test of governance and independence. ESMA’s confirmation that valuation will remain a supervisory priority into 2026, alongside ongoing work on harmonised benchmarks, enhanced stress testing, and safeguards against conflicts of interest, signals a regulatory environment that is both dynamic and demanding. The CSSF’s feedback on the 2025 Common Supervisory Action has already required investment fund managers to reassess their frameworks, with particular attention to governance, independence, and the control of assumptions. Spot checks and closer scrutiny of valuation committees are expected, and a revision of Circular 18/698 may be on the horizon. The UK’s Financial Conduct Authority has also highlighted weaknesses in valuation independence during periods of market stress, a development that is likely to influence regulatory practice within the EU.

A sophisticated understanding of the distinction between internal and external valuation models is now essential for fund managers and directors operating under the Alternative Investment Fund Managers Directive. When valuations are performed internally, the Alternative Investment Fund Manager (“AIFM”) retains full responsibility for determining asset values, even when third-party valuers are engaged for specialist input. These external consultants, while independent, do not hold final authority; their assessments must be critically reviewed and approved by the AIFM, which remains ultimately liable. This model demands robust internal policies, independent oversight, and a clear escalation process for managing conflicts of interest and valuation errors.

Conversely, when the valuation function is delegated to an External Valuer, the responsibility for determining final asset values shifts, but the AIFM’s accountability does not dissipate. The AIFM must conduct rigorous due diligence, maintain ongoing oversight, and ensure that the External Valuer is both independent and competent. The External Valuer cannot further delegate this function and must accept unlimited liability for any failures, a requirement that often deters many third-party firms from accepting such appointments. Directors must remain vigilant, ensuring that valuations are accurate, independent, and aligned with regulatory expectations, regardless of the model adopted. This involves maintaining a comprehensive understanding of the valuation operating model, enforcing structured reporting and escalation frameworks, ensuring the use of independent sources and methodologies, and monitoring the effectiveness of controls.

The pressure on fund managers is clear; valuation is no longer a technical exercise but a strategic and regulatory imperative. Governance frameworks must be robust, methodologies standardised and evidence-based, and models transparent and traceable. Independent validation and proactive stress testing are essential to anticipate market volatility and maintain investor confidence. Failure to adapt risks not only regulatory sanction but also reputational damage at a time when credibility is paramount.

The era of opaque valuation practices has ended. In today’s market, characterised by complexity and increased regulatory oversight, transparency is the foundation upon which trust is built. For those who adapt to this change, compliance is not simply an obligation, it is a strategic advantage. At Cafico International, we understand the intricacies of fund valuation and compliance. Our team offers tailored solutions that combine technical expertise with a client-centric approach, ensuring transparency, efficiency, and peace of mind for our clients. By entrusting your back-office responsibilities to us, you can focus on your core competencies and foster the growth of your assets, confident that your valuation processes meet the highest standards of governance and regulatory expectation.

How We Can Help

Navigating the intricacies of fund management and compliance requires a dedicated and experienced team. At Cafico International, we understand the complexities surrounding alternative investment funds. We offer a comprehensive suite of services tailored to our clients’ exact requirements, domiciliation, corporate services, fund accounting, transfer agent, financial and regulatory reporting. Our client-centric approach ensures a single dedicated point of contact and a 24-hour response time. With state-of-the-art technology, we guarantee complete transparency across all processes. By entrusting your back-office responsibilities to us, you can focus on your core competencies and foster the growth of your assets. We handle the administrative complexities, allowing you to operate with confidence and peace of mind. For more information on the above, please contact Philip J. Murphy, Director of Fund Services.