FCA, the UK’s financial regulator, is preparing to launch a sweeping review of valuations in private markets, amid growing fears over the impact of higher borrowing costs on the sector.
The FCA’s exercise will be looking at who within a firm is accountable for valuations, how information about those valuations is passed upwards to the relevant management committee and board and what other governance procedures are in place.
The exercise, to start by the end of year 2023, comes as global regulators grow increasingly uneasy about the potential for blowups in private assets and other markets following the abrupt reversal of more than a decade of low-interest rates.
Global securities regulator Iosco recently warned that the $13tn global private capital sector was too complacent about possible risks, highlighting valuations as one vulnerable area.
Private assets such as real estate and unlisted shares and bonds are often valued using models that are typically slower to respond to deteriorating market conditions than listed assets.
Assets are usually valued on a quarterly basis, meaning that a sharp market correction may not feed through to the valuations for weeks, if not months.
Fund managers who invest in private markets typically have greater discretion over the valuation of their own assets because their holdings are not subject to the daily swings of public market sentiment.
According to media, if the FCA does not feel that the governance processes are robust, it may call out failures. If a firm does not respond, it could be ordered to make improvements. There are about 2,600 firms in the UK’s £11tn asset management industry, with the FCA acting as their regulator. The firms include hedge funds, venture capital and private equity, as well as big institutional asset managers.
US regulators have responded to fears about private markets by ordering private funds to make more extensive disclosures about their performance, an initiative that has prompted a lawsuit from a coalition of private equity, venture capital and hedge funds.