FCA confirms review of private market valuations
The Financial Conduct Authority (FCA) has confirmed it will undertake a review of private market valuations, following concern that firms may not be applying appropriate rigour.
The plans were first revealed in a report in the Financial Times in September, after the International Organization of Securities Commissions warned that the $13tn (£10tn) global private capital sector was too complacent about possible risks.
Now, in a “Dear CEO” letter published on 1 March, the regulator confirmed it will review valuation practices for private assets.
“Building on the work we completed in 2023 on liquidity management, we will be conducting a multi-firm review examining valuation practices for private assets, including examining the personal accountabilities for valuation practices in firms, governance of valuation committees, the information reported to boards about valuations and the oversight by relevant boards of those practices,” the letter said.
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The review will affect institutional investors and managers of private assets, such as bonds, real estate, private credit and portfolio companies.
The concern that sparked the review is that while the rise in interest rates has negatively affected the prices of listed equities and government bonds, the values of unlisted assets may not have been adjusted accordingly, prompting a need to review current valuation methods.
At present, the valuation of assets does not have to be carried out independently for UK and EU alternative investment funds.
The FCA currently allows alternative investment fund managers to perform the valuation, if it is independent from the portfolio management and conflicts of interest are mitigated.
However, this throws up a concern that where fees are calculated based on valuation, there is a potential incentive to over-value assets.
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According to analysis by Reed Smith, the FCA also wants to understand how the valuations of private assets feed back into banking, insurance or capital markets, and is working with other regulatory bodies, such as the Financial Stability Board to monitor this.
The law firm warns that the review could have significant implications for the valuation of private assets and the performance and reputation of funds and managers.
If the regulator calls for increased transparency and disclosure on valuation methodologies, the regulatory burden and scrutiny from investors and auditors may also increase.
The firm warns that: “If public markets are down materially, there may be an advantage to seek to exit the fund before it is revalued downwards (a ‘first mover advantage’). This could lead to funds being unable to meet redemptions and suspending redemption requests from the fund, which would likely have negative knock-on effects.”
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