The FCA have identified some concerns around valuations that could harm investors and the smooth functioning of the market for funds of private assets. The review, which may be launched within the next few weeks, aims to tackle any situation where a fund over-values or under-values its assets as it could lead to investors, and underlying beneficiaries, buying and selling assets at an unfair price.
Particular concerns of the FCA are likely to be around conflicts of interest and the extent of the influence or input that the investment manager has on the valuation process, the frequency on which valuations are updated and the possible exploitation by some investors of known deficiencies in the valuation.
For DC schemes, new regulations have been introduced that make it easier to hold illiquid assets in multi-asset ‘lifestyle’ funds. For DC members and trustees, it will be of critical importance to have confidence in the valuation of their private asset funds.
For UK and EU authorised funds, the valuation of private assets must be carried out independently of the portfolio managers, however there is no stipulation that an external firm should do this. LCP believe that in the review there may be increased scrutiny on investment managers who choose to make valuations internally and greater questions around management of conflicts and performance fee calculation.
LCP think that the review is an opportunity to have 5 key changes that would improve the market:
• Use of truly independent valuers. The FCA should provide stronger guidance on the separation of valuations from manager influence.
• Clarity on how conflicts of interest are managed
• Robust procedures for the valuation process;
• More frequent assessments of valuation. Currently, valuations occur fairly infrequently, with quarterly being common.
• Procedures for timely reviews of valuations if significant market events occur.
Mark Watts CFA, Partner at LCP, commented: “Whatever the outcome of the review, changes that give investors greater confidence in the valuations of private assets and boosts transparency would be most welcome and needed. Rising interest rates globally and changes in market conditions for private assets make this review timely.
“The valuation of private assets is an art, not a science but improvements can and should be made to ensure robustness in the process.”
|
