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Britain’s top financial regulator is preparing a sweeping review of private market valuations, people familiar with the matter said, as concerns grow about the impact of rising borrowing costs on the sector.
A person familiar with the matter said the operation will focus on “discipline and governance” of valuations as the Financial Conduct Authority launches a major review of liquidity at asset managers following last year’s turmoil in the UK bond market.
This includes looking at who within the company is responsible for the valuation, how that valuation information is communicated up to the relevant management committee and board of directors, and what other governance procedures are in place, the person said.
The action, due to be launched by the UK’s Financial Conduct Authority (FCA) at the end of the year, comes as regulators around the world are growing increasingly uneasy about a possible collapse in private assets and other markets after an abrupt reversal of more than a decade of low interest rates. .
Global securities regulator the International Organization of Securities Commissions (Iosco) recently warned that the $13 trillion global private capital sector was too complacent about possible risks, highlighting valuations as one of many areas where vulnerabilities could emerge.
Private assets such as real estate, unlisted stocks and bonds are often valued using models that often respond more slowly to deteriorating market conditions than listed assets.
Assets are typically valued on a quarterly basis, meaning a sharp correction in the market may not affect valuations for weeks or even months.
Fund managers who invest in private markets typically have greater discretion over the valuation of their assets because their assets are not affected by daily swings in public market sentiment.
The FCA may flag failures if it considers governance processes to be inadequate. If a company does not respond, it could be ordered to make improvements, as valuations are “part of the risk environment” for regulated companies, the person added.
The second person said the scope of the review had not yet been fully defined and would not begin until later this year. The number and types of asset managers involved have not yet been finalized, the person said.
FCA declined to comment.
There are around 2,600 companies in the UK’s £11 trillion asset management industry, for which the FCA is the main regulator. They include hedge funds, venture capital and private equity, as well as large institutional asset managers.
Richard Olson, a valuation expert at Lincoln International Investment Bank, said the FCA’s investigation could be a “wake-up call” that could push some funds towards outsourced valuations.
A senior executive at a major institutional asset manager welcomed the review. “The private market cannot just follow its own model, there needs to be an independent verification process,” he said.
In July, the FCA harshly criticized asset managers’ liquidity management, warning some firms of a “lack of coherence” in their plans to handle large redemptions and ordering them to improve.
U.S. regulators responded to concerns about private markets by ordering private equity funds to disclose their performance and fees more broadly, a move that prompted a lawsuit from a coalition of private equity, venture capital and hedge funds.
Additional reporting by Costas Mourselas, Will Louch and Josephine Cumbo
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