City regulator to launch review of private market valuations

The Financial Conduct Authority (FCA) is planning to launch a review of valuations in private markets, amid concerns that the private capital sector is too complacent about the possible risks.

The City watchdog is reportedly set to examine who is accountable for valuations within a firm, how information about those valuations is passed upwards to the relevant management committee and board, and what other governance procedures are in place, according to a source cited in a report in the Financial Times.

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Private assets – such as real estate and unlisted shares and bonds – are typically valued on a quarterly basis, meaning that they are slower to respond to worsening market conditions than listed assets.

Therefore, fund managers who invest in private markets tend to have more discretion over the valuation of their own assets as they are not beholden to daily movements in the stock market.

The review comes after the International Organization of Securities Commissions, a global securities watchdog, warned that the $13tn (£10tn) global private capital sector was too complacent about possible risks, with valuations cited as one particular area of concern.

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If the FCA does not feel that the governance processes are robust, it will highlight failures. If a firm does not respond to that then it can be ordered to make improvements, because valuations are “part of the risk environment” for regulated firms, the source cited in the Financial Times report said.

A second person cited by the Financial Times said that the review had not yet been fully scoped out and the number and type of asset management firms involved has not yet been finalised.

There are approximately 2,600 firms in the UK’s £11tn asset management industry, including hedge funds, venture capital and private equity.

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