Private market valuation processes are in need of some improvement amid the sector’s significant growth, including the need for enhanced processes for ad hoc valuations in episodes of disruption in markets, the U.K.’s financial watchdog said.
The Financial Conduct Authority released on March 5 findings from a recent multifirm assessment of valuation processes and governance across private equity, venture capital, private debt and infrastructure. The sample represented £3 trillion ($3.72 trillion) in global private markets assets under management, with £1 trillion of that in the U.K. It said while there was good practice, there was room for improvement, such as a need for better identification and documentation of potential conflicts of interest, and more independence within those valuation processes.
Investor reporting, process documentation and use of third-party valuation advisers generally showed good practice, the FCA said.
The FCA will use its findings as it updates rules for the Alternative Investment Fund Managers Directive, which regulates hedge funds, private equity and other alternatives managers; and in the FCA’s contribution to a review of global valuation standards in private markets by the International Organization of Securities Commissions.
Responding to the FCA’s findings, asset manager aberdeen said the industry needs standards, noting that “there is no single standard for how to value a private market asset — creating inconsistencies — and we would not be surprised to see the same asset valued differently in two different portfolios,” said Nalaka De Silva, head of private markets, in an emailed comment. “For investors, particularly pension fund trustees and retail investors, to get on board with private markets, we need to boost trust.”
The firm wants to see some kind of “‘gold standard’ guidance covering how a private asset should be valued, how frequently and who will value it. This may come from the FCA or it may come via industry collaboration — either way it needs to come,” De Silva said.
The FCA is the latest entity to raise concerns about private markets and valuations. In December the Australian Prudential Regulation Authority said the A$4.1 trillion ($2.6 trillion) Australian super fund industry had weak oversight of private markets valuations, while a report commissioned by the world’s largest pension fund, Japan’s Government Pension Investment Fund, showed gaps in infrastructure assets data.
