UK regulator warns on valuations and conflicts of interest at private asset firms
The UK’s Financial Conduct Authority (FCA) has raised concerns about “poorly managed conflicts of interest” at private asset fund managers, and revealed that it will shortly release the findings from its review into valuations.
The City watchdog has written a ‘dear CEO’ letter to asset management bosses outlining its supervisory approach, including a section on private markets.
It announced that it is launching a review this year into conflicts of interest at private asset fund managers, which it said “increase the likelihood and severity of investor harm.”
Conflicts may increase where firms operate multiple intersecting business lines, continuation funds, co-investment opportunities or partner with other financial institutions, it said.
Additionally, the FCA said it will shortly release its review into private market valuations. It launched the review last year due to concerns around the opacity around asset valuations compared to public markets, where assets are frequently traded and priced.
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“Without the frequent trading and regular price discovery present in more liquid public markets, firms must estimate private asset values using judgement-based approaches to meet applicable accounting standards,” said Camille Blackburn, director, wholesale buy-side at the FCA, who authored the letter.
“This introduces a risk that firms could value private assets inappropriately, for example through poorly managed conflicts of interest or insufficient expertise. Investors need fair and appropriate valuations to make informed decisions and understand how their investments perform.
“Where firms use valuations to price transactions, this may affect fairness between buyers, sellers, and remaining investors. Where firms use valuations to calculate fees, there is a risk of firms inappropriately charging investors.”
Read more: FCA chief calls for “proportionate regulatory approach” to private markets
In the letter, the FCA also raised concerns about the ‘retailisation’ of private markets and underlined the importance of educating retail investors about these types of assets. It said it will continue to supervise these issues to support the sector’s transition to retail offers of private market products.
Read more: Moody’s tips private credit market for $3tn growth
Private markets have seen stratospheric growth globally in recent years, as investors look for diversification away from public markets and higher returns. Private credit alone has been predicted to swell to $3tn (£2.4tn) by 2028, according to ratings agency Moody’s.
