UK's FCA urged to focus on transparency-boosting guidance in private asset review

The UK Financial Conduct Authority’s (FCA) forthcoming review into the way investment funds value private assets should focus on providing guidance that improves transparency, according to LCP.

With the government seeking to drive institutional investors, including pension schemes, to use private assets in portfolios, LCP stated that it was of critical importance for defined contribution (DC) scheme trustees and members to have confidence in the valuation of their private asset funds, our sister title, Pensions Age, reports.

The FCA has identified concerns around valuations that could negatively impact investors and the efficiency of the private asset fund market.

Its review, which is expected to be launched in the coming weeks, will aim to address situations where a fund over- or under-values its assets as it could lead to investors buying or selling assets at an unfair price.

LCP noted that it was likely that the FCA has particular concerns around conflicts of interest and the extent of the influence or input that investment managers have on the valuation process, the frequency on which valuations are updated, and the potential exploitation of known deficiencies in the valuation by some investors.

New regulations have been introduced for DC schemes to make it easier to hold illiquid assets in multi-asset lifestyle funds.

For UK- and EU-authorised funds, the valuation of private assets are required to be carried out independently of the portfolio managers, but there is no stipulation that an external firm should do this.

LCP said it believed that, in the review, there may be increased scrutiny on investment managers that choose to make valuations internally, as well as greater questioning around management of conflicts and performance fee calculation.

The consultancy highlighted five key changes it felt could improve the market: Use of truly independent valuers; clarity on how conflicts of interest are managed; robust procedures for the valuation process; more frequent valuation assessments; and procedures for timely reviews of valuations if significant market events occur.

“Whatever the outcome of the review, changes that give investors greater confidence in the valuations of private assets and boosts transparency would be most welcome and needed,” commented LCP partner, Mark Watts.

“Rising interest rates globally and changes in market conditions for private assets make this review timely.

“The valuation of private assets is an art, not a science but improvements can and should be made to ensure robustness in the process.”

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