The Financial Conduct Authority has called for improvements in the way private market investments are valued, to ensure ‘fairness’ and ‘confidence’ in the sector, as fund managers and DC schemes increasingly seek exposure to these assets.
The FCA did stress it found good practice in this multi-firm review of private market valuation processes, covering private equity, venture capital, private debt, and infrastructure assets. However, it also highlighted a number of areas where there were room for improvement. These included the need to better identify and document potential conflicts of interest in the valuation process and it said there was a need for increased independence within the firms’ own valuation processes.
The FCA also found that some firms needed to enhance processes for ad hoc valuations in times of market disruption. It says improvements in these areas are particularly important with growing retail investor exposure to private assets.
More positively, the FCA said firms generally demonstrated good practice in areas, such as investor reporting, process documentation, use of third-party valuation advisers, and were consistently applying valuation methodologies.
The FCA said robust valuation practices are important, give that private market assets don’t have the frequent trading and regular price discovery that are present in more liquid public markets.
Private markets have grown significantly in recent years with the UK continuing to be the largest centre for private market asset management in Europe. This market is expected to grow further with the Government keen to drive further DC investment into this sector as a means to boost growth in the UK economy while also delivering better returns for savers.
The FCA says these findings will be used in its review of Alternative Investment Fund Managers Directive (AIFMD) as it updates its rules in the Handbook, and will inform the FCA’s contribution to IOSCO’s review of global valuation standards to support the use of proportionate and consistent valuation standards globally in private markets.
FCA director of wholesale buy-side Camille Blackburn says: “The UK is the largest centre for private asset management in Europe. Investor demand from individuals and institutions has driven significant growth.
“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 valuations process.
“There is still more to do, and we expect firms to carefully consider our findings.”
The Investment Association director, investments & capital markets, Galina Dimitrova adds: “Private markets are a significant growth area for investment managers and have increasingly become an important part of a diversified investment portfolio.
“Ensuring firms are carrying out robust and accurate valuations is mission critical for the long-term success of private markets. Getting this right will boost confidence amongst investors whilst encouraging firms to invest in developing their private market capabilities.”
She adds: “The IA has worked extensively with government, policymakers, regulators and key industry stakeholders to deliver the benefits private markets can provide. We support the FCA’s recognition that a robust valuation is based on independence, expertise, transparency and consistency, and look forward to working with our members and the regulator as the industry looks to implement the FCA’s best practice recommendations.”
