The Financial Conduct Authority (FCA) has called for asset managers to improve the independence of private markets valuation processes following an industry review.
The watchdog assessed firms investing in private equity, venture capital, private debt, and infrastructure assets. It found that, despite good practice demonstrated in many areas, managers needed to improve valuation processes.
In particular, the FCA highlighted the management of conflicts of interest as a key area for improvement, as well as the way in which valuations are carried out during times of market disruption.
Camille Blackburn, director of wholesale buy-side at the FCA, said: “Good valuation practices are key to maintaining fairness and confidence as the market grows. We were pleased that firms could usually evidence independence, expertise, transparency and consistency in their valuation process.
“There is still more to do, and we expect firms to carefully consider our findings.”
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All firms in the FCA’s assessment identified conflicts linked to fees and remuneration, but many had sought to mitigate these through adapted fee structures and pay policies.
However, the FCA added that “other potential conflicts were only partly identified and documented”.
“We expect firms to identify, document and assess all potential and relevant valuation-related conflicts, their materiality and actions they may need to take to mitigate or manage them,” the watchdog’s report stated.
It was particularly important that managers address these conflicts as demand for private markets assets grows, and retail investors become more exposed to these markets through defined contribution pension schemes.
found that that more than half (51%) of the 500 institutions surveyed expected to increase their allocation to private markets over the next two years.
European investors – including those in the UK – were the most likely to want to invest more, with 57% saying they will increase allocations.
Accurate valuations ‘mission critical’ to private markets success
Nalaka De Silva, head of private market solutions at Aberdeen, said the difficulty of assessing valuations was “one of the biggest barriers blocking greater retail access to private markets”.
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“Valuing a private asset is no easy thing and it’s important to remember there is a difference between price and value,” he said.
“Assets can range from technically complex infrastructure projects to portfolios of private companies at different stages of growth.
“Therefore, a team of specialist professionals is usually required to conduct in-depth analysis, which comes at a significant cost, easily tens to hundreds of thousands per valuation.”
There was no set standard for valuing private market assets, which resulted in inconsistencies between valuations, De Silva explained. “For investors, particularly pension fund trustees and retail investors, to get on board with private markets, we need to boost trust,” he said.
Galina Dimitrova, director of investments and capital markets at asset management trade body the Investment Association, said “robust and accurate valuations” were “mission critical for the long-term success of private markets”.
“Getting this right will boost confidence among investors while encouraging firms to invest in developing their private market capabilities,” Dimitrova added.
The FCA said its findings would feed into a wider review of the Alternative Investment Fund Managers Directive, the rulebook for asset managers operating in private markets.
