Introduction
For many years, valuation was often viewed as a technical process undertaken by finance teams, valuation specialists and external advisors, sometimes in Luxembourg, often at group level. Today, however, valuation governance in Luxembourg has become one of the most scrutinised areas of the alternative investment industry.
Across Europe, regulators are increasingly focusing not only on the outcome of valuations, but also on the governance, oversight and controls surrounding the valuation process. In Luxembourg, this supervisory focus has continued to intensify through successive regulatory developments, industry guidance and regulatory reviews.
For AIFMs, General Partners, Conducting Officers and fund boards, valuation governance in Luxembourg is about selecting an appropriate methodology. It is also about demonstrating that valuation decisions are robust, independent, well-documented and subject to effective challenge.
The critical question has evolved from:
“How do we value our assets?”
to
“Can we demonstrate that our valuation framework would withstand regulatory scrutiny?”
Why valuation governance in Luxembourg has become a regulatory hot topic over the past years
Several factors have elevated valuation to the top of regulatory agendas.
The rapid growth of private markets has increased the proportion of illiquid and complex assets held by alternative investment funds. Private equity, private debt, infrastructure and real estate strategies often require significant judgement when determining fair value.
At the same time, valuation outcomes may directly influence:
- investor reporting;
- performance measurement;
- management fees;
- carried interest calculations;
- subscriptions and redemptions;
- regulatory reporting.
Regulators have therefore become increasingly concerned not only with valuation methodologies, but also with the valuation governance arrangements intended to mitigate conflicts of interest and ensure objective decision-making.
This evolution explains why valuation governance continues to feature prominently in both European and Luxembourg supervisory initiatives.
How did we get here? The evolution of valuation governance expectations
AIFMD: establishing the foundation
The Alternative Investment Fund Managers Directive (AIFMD) fundamentally changed the European valuation landscape.
Article 19 of AIFMD introduced formal valuation requirements for alternative investment funds and established key principles including:
- appropriate and consistent valuation procedures;
- documented valuation policies;
- independence of the valuation function;
- management of conflicts of interest;
- periodic review of valuation arrangements.
For the first time, valuation, a key aspect of the investing process, became a core regulatory obligation rather than a technical matter.
While AIFMD established clear principles, many practical questions remained unanswered. Firms quickly realised that compliance required more than simply documenting valuation methodologies.
The challenge went towards demonstrating independence, governance and effective oversight from Luxembourg AIFMs and Management Companies over the overall process.
Luxembourg valuation governance implementation and supervisory expectations
Luxembourg transposed AIFMD through the Law of 12 July 2013 on Alternative Investment Fund Managers, incorporating the valuation requirements into the local regulatory framework later precised by the CSSF Circular 18/698.
Over time, CSSF supervisory expectations also evolved. While the legal requirements remained largely principles-based, the regulator’s focus increasingly expanded towards how firms governed the valuation process in practice.
This reflected a broader supervisory trend: regulators were becoming less interested in whether a policy exists and more interested in whether it is actually operating effectively.
Industry guidance fills the practical gap
As firms sought greater clarity, industry bodies developed practical guidance to support implementation.
The ALFI Valuation Guidelines became an important reference point for the Luxembourg funds industry. The guidelines provided practical considerations regarding governance structures, valuation processes, methodologies and documentation.
Similarly, the Luxembourg Private Equity and Venture Capital Association (LPEA) published recently also a guidance tailored to the specific characteristics of private equity and venture capital investments.
These publications play a critical role in shaping market practice for valuation governance in Luxembourg and promoting consistency across the industry.
Importantly, however, firms should remember that these documents represent industry guidance and market practice rather than binding regulatory requirements. They are a useful guide in setting up and evaluation a valuation framework from a governance perspective. Technical guidelines exists also from the relevant bodies.
They are increasingly relevant because they help define what regulators may consider to be reasonable and robust valuation arrangements. A mention should also go to the work done recently by the Luxembourg Valuation Professionals Association (LVPA).
ESMA’s Common Supervisory Action* – A Turning Point
The European Securities and Markets Authority (ESMA) significantly increased attention on valuation through its Common Supervisory Action (CSA) focusing on valuation practices.
The CSA highlights a number of recurring weaknesses across the European alternative funds sector, including:
- insufficiently detailed valuation policies;
- inadequate documentation supporting valuation decisions;
- inconsistent application of methodologies;
- weaknesses in governance arrangements;
- inadequate management of valuation conflicts;
- insufficient evidence of challenge over assumptions and inputs.
A key lesson emerged from the CSA.
Regulators were no longer focusing solely on valuation outputs. They were increasingly assessing whether firms could demonstrate a robust governance framework supporting those outputs.
This represented a significant development in supervisory thinking.
Recent CSSF focus confirms valuation governance in Luxembourg remains a priority
More recent CSSF supervisory communications and thematic reviews suggest that valuation continues to be an area of regulatory attention.
The recurring themes are remarkably consistent with the findings identified at European level:
- valuation governance adequacy;
- oversight effectiveness;
- management of conflicts of interest;
- appropriateness of challenge;
- quality of documentation;
- robustness of control frameworks.
The message is clear.
Having a valuation policy is no longer sufficient.
Firms are increasingly expected to demonstrate evidence that:
- management understands valuation risks;
- boards exercise meaningful oversight;
- critical assumptions are challenged;
- conflicts are identified and managed appropriately;
- valuation decisions are properly documented and justified.
In practice, this means valuation is increasingly assessed as a governance framework rather than a technical calculation.
The growing regulatory focus on valuation governance in Luxembourg is reflected in the CSSF Annual Report 2025, which outlines the regulator’s supervisory activities and increasing attention to governance, risk management and control frameworks within the asset management sector. Available here.
What regulators are really looking for
While methodologies remain important, supervisory reviews increasingly focus on broader questions.
Is there genuine independent challenge?
Many valuations are heavily influenced by investment teams that possess the deepest knowledge of portfolio assets.
This is understandable and often necessary.
However, regulators increasingly expect evidence that assumptions and conclusions have been independently reviewed and challenged, in Luxembourg, by the local valuation teams.
The absence of documented challenge may create the appearance that valuations are effectively self-assessed and the overall valuation process is properly known, managed, overseen.
Are conflicts of interest properly managed?
Valuation outcomes may affect fees, performance metrics and investor perceptions.
Consequently, firms must be able to identify where conflicts may arise and demonstrate that appropriate safeguards have been implemented.
Simply stating that conflicts are managed, or worse that there are no conflicts, is unlikely to be sufficient at best, and would be a major red flag at worst.
Firms should be capable of evidencing how conflicts are identified, assessed and mitigated. They should reasonably reflect potential conflicts in the organisation.
Does the board have sufficient oversight?
Valuation is increasingly viewed as a board-level governance issue.
Regulators expect boards to understand:
- key valuation risks;
- significant assumptions;
- methodology changes;
- material judgement areas;
- valuation exceptions and overrides;
- oversight performed by valuation teams over valuation service providers, intra or extra-group.
Board oversight should be active, informed and evidenced. They also should make sure that policies content reflect the reality and are effectively implemented through procedures and adequate controls and that those controls are functioning.
Is there a clear audit trail?
A conclusion without documented rationale is unlikely to withstand supervisory scrutiny.
Regulators increasingly expect firms to retain evidence demonstrating:
- why specific methodologies were selected;
- how assumptions were determined;
- what challenge occurred;
- how disagreements were resolved;
- who approved decisions.
Documentation remains one of the strongest indicators of governance maturity.
It should cover also the entirety of the oversight process. Was a risk assessment performed on third party (internal and external) having any type of input into the valuation? Have due diligences been scheduled, performed and reported accordingly? What was their content and depth? Have red and orange results been followed up and remediation measures implemented?
Common weaknesses still observed in practice in valuation governance framework
Despite significant industry progress, several weaknesses continue to appear across valuation frameworks.
These often include:
Governance weaknesses
- valuation committees operating without clearly defined mandates;
- unclear allocation of responsibilities;
- insufficient escalation procedures.
Challenge weaknesses
- reliance on sponsor or investment team valuations without documented challenge;
- limited evidence supporting key assumptions;
- inadequate review of external valuation reports.
Documentation weaknesses
- conclusions documented without supporting rationale;
- missing records of challenge discussions;
- insufficient evidence supporting significant judgements.
Board oversight weaknesses
- excessive focus on valuation outcomes rather than valuation risks;
- limited discussion of assumptions and uncertainties;
- insufficient reporting on valuation exceptions.
These weaknesses do not necessarily indicate incorrect valuations.
However, they may create difficulties when firms need to demonstrate the robustness of their governance framework to regulators, auditors or investors.
What good valuation governance in Luxembourg looks like
A mature valuation framework typically incorporates six key elements.
1. Clearly defined governance
Roles and responsibilities within and outside the AIFM/Management Company should be formally documented, understood and consistently enforced.
2. Independent challenge
Key assumptions, inputs and conclusions should be subject to meaningful review and challenge within the AIFM/Management Company and versus the valuation service providers.
3. Methodology governance
Methodologies should be aligned with constitutive documentation, consistently applied, periodically reassessed and formally approved.
4. Effective conflicts management
Potential conflicts should be identified, documented and appropriately mitigated. This should be part of the broader conflict management process at fund and AIFM/Management Company levels.
5. Comprehensive documentation
The rationale underlying valuation decisions should be retained and readily accessible.
6. Board engagement
Boards should actively oversee valuation risks and challenge management where appropriate as well review du due diligence and inquire about results and follow-up.
The boardroom question for 2026 and beyond
The Luxembourg valuation framework has evolved considerably since the introduction of AIFMD.
What began as a technical valuation requirement has become a broader governance and supervisory priority.
The combined impact of AIFMD, Luxembourg supervisory expectations, ILA, ALFI and LPEA guidance, European supervisory initiatives and recent regulatory focus points toward a common conclusion:
Valuation is increasingly being assessed as a governance framework rather than a calculation exercise.
As regulatory expectations continue to evolve, valuation can no longer be viewed solely as an operational process delegated to finance teams, portfolio managers or external valuation specialists.
Boards remain ultimately responsible for ensuring that valuation arrangements are robust, appropriately governed and capable of withstanding regulatory scrutiny. For Luxembourg AIFMs, General Partners and fund boards, the most important question is therefore no longer whether a valuation policy exists.
The following questions can help directors assess whether their valuation framework is operating effectively in practice.
1. How do we know key valuation assumptions are being challenged?
Many valuation inputs require significant judgement, particularly for private equity, private debt, infrastructure and real estate assets.
Boards should understand:
- who challenges key assumptions;
- how disagreements are resolved;
- whether independent challenge is documented;
- whether challenge remains effective when valuations originate from investment teams or sponsors.
A valuation framework without evidence of challenge may raise questions regarding independence and objectivity.
2. Are conflicts of interest clearly identified and appropriately managed?
Valuation outcomes can directly impact management fees, carried interest, investor reporting and performance assessments.
Boards should consider:
- where valuation conflicts may arise;
- whether conflicts are formally assessed;
- what safeguards are in place;
- whether conflict mitigation measures are periodically reviewed.
The question is not whether conflicts exist. In many cases they inevitably do. The real question is whether they are identified, documented and managed appropriately.
3. Could we explain and defend our valuation decisions to the CSSF?
A common misconception is that a valuation is defensible simply because a recognised methodology was used.
Regulators typically focus on a broader set of considerations, including:
- the rationale supporting assumptions;
- evidence of challenge;
- governance surrounding approvals;
- consistency of application;
- supporting documentation.
Boards should ask whether they could confidently explain not only the result, but also the decision-making process that produced it.
4. Does the board receive sufficient information to exercise meaningful oversight?
Board reporting frequently focuses on valuation outputs rather than valuation risks.
Effective oversight requires visibility over:
- material assumptions and judgements;
- methodology changes;
- valuation uncertainties;
- significant adjustments;
- valuation exceptions;
- areas where management challenge was required.
5. If the CSSF reviewed our valuation framework tomorrow, what evidence would we provide?
This may be the most important question of all.
Regulatory reviews increasingly focus on what firms can demonstrate rather than what they state in policies and procedures.
Boards should consider whether they can readily evidence:
- governance arrangements;
- valuations reviewed and challenged;
- committee discussions and decisions;
- management of conflicts of interest;
- methodology reviews;
- board oversight activities.
Well-designed frameworks are not only robust in operation. They are capable of demonstrating that robustness through a clear and comprehensive audit trail to any informed third-party.
Conclusion
As valuation continues to attract increasing regulatory attention, Luxembourg AIFMs, General Partners and fund boards should recognise that supervisory expectations now extend well beyond valuation methodologies themselves. The combined impact of AIFMD, industry guidance from ALFI, LPEA and ILA, European supervisory findings and recent CSSF focus points to a common conclusion: valuation is increasingly being assessed through the lens of governance, oversight, independence and documentation.
In this evolving environment, firms should not wait for a regulatory review, audit finding or investor challenge to assess the robustness of their valuation framework. A proactive approach can help identify governance gaps, strengthen oversight arrangements and demonstrate that valuation processes are operating effectively in practice.
Ultimately, the organisations best positioned for future regulatory scrutiny will not necessarily be those with the most sophisticated valuation models, but those able to evidence strong governance, effective challenge, robust documentation and active board oversight throughout the valuation process.
How Excelsia Can Help
Excelsia supports Luxembourg alternative investment managers, fund boards and governance bodies in assessing and strengthening their valuation frameworks through services including:
- Independent valuation governance reviews against AIFMD requirements, CSSF expectations and recognised industry practices;
- Gap assessments and health checks of valuation policies, procedures and operating models;
- Board and Conducting Officer advisory services focused on valuation oversight and governance responsibilities;
- Valuation committee effectiveness reviews, including mandates, reporting lines and challenge practices;
- Conflict of interest assessments related to valuation processes and decision-making;
- Internal audit reviews of valuation frameworks, governance arrangements and supporting controls;
- Regulatory readiness assessments designed to prepare firms for supervisory reviews, inspections or investor due diligence;
- Training and awareness sessions for boards, Conducting Officers, valuation committees and control functions.
As valuation continues to evolve from a technical exercise into a key governance discipline, firms that periodically challenge and reassess their framework will be better equipped to meet regulatory expectations, investor demands and future supervisory scrutiny.
* Readers wishing to explore the supervisory findings in greater detail may refer to ESMA’s Final Report on the 2022 Common Supervisory Action on Asset Valuation, which identified deficiencies relating to valuation governance, independence, documentation and valuation policies across the European funds industry.
