Rules and regulations
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Fund managers that deal in private equity, private credit, venture capital and other kinds of illiquid, unlisted assets, need to do a better job when it comes to independently valuing these assets, and addressing conflicts, the U.K.’s Financial Conduct Authority (FCA) says.

The regulator carried out a review of asset managers’ private market valuation practices, which found some good practice in areas such as investor reporting and the application of valuation methodologies — but it also uncovered areas where firms need to improve, including dealing with potential conflicts of interest and enhancing the independence of their valuation processes.

In particular, the review found that while many firms identified and addressed conflicts in their valuation process that involved fees and remuneration, other sorts of potential conflicts were only partly identified. 

“These included potential valuation-related conflicts related to investor marketing, secured borrowing, asset transfers, redemptions and subscriptions and uplifts and volatility,” it said. 

The regulator stressed that firms are expected to identify all potential valuation-related conflicts, their materiality, and the actions needed to mitigate these conflicts. 

It also called on firms to “assess whether they have sufficient independence in their valuation functions and … their valuation committees” to ensure these processes are adequately rigorous.

And, the FCA said firms need to enhance their processes for valuing private assets during disruptions. 

For instance, the regulator found that many firms didn’t have defined processes for making ad hoc valuations during market disruptions, or asset-specific events.

“Given the importance of these valuations in managing the risk of stale valuations, firms are encouraged to consider the types of events and quantitative thresholds that could trigger ad hoc valuations and document how they are to be conducted,” it said.

The FCA said that robust valuation practices in private markets are particularly important, given the growing retail investor exposure to the category — and to shore up investor confidence, enabling continued growth in private market fund management. 

“Good valuation practices are key to maintaining fairness and confidence as the market grows,” noted Camille Blackburn, director of wholesale buy-side at the FCA, in a release. 

The regulator stressed that firms should consider the findings of the review, and their own practices.

The results of the exercise will be used as the FCA updates its rules for alternative investment fund managers, and as it provides input to a review of global valuation standards in private markets by the International Organization of Securities Commissions (IOSCO), it also noted.