The worries raised by the Commission de Surveillance du Secteur Financier, Luxembourg's main financial regulator, and the Bank of Ireland as they investigate how things are valued in their areas highlight how important it is to watch and control the way we figure out the worth of private assets.
Adding to the complexity, the US Securities and Exchange Commission’s new rules further enhance the regulation of private fund advisers and update the existing compliance rule applied to all investment advisers. This requires annual audits for every private fund in order to avoid asset misappropriation and guarantee accurate valuations.
The SEC’s additional rule aims for a more fair valuation and reduction of fraud by bringing in an independent provider led by a registered adviser. As a result, there will be a substantial increase in administrative work but also valuable time needed from internal or third-party professionals.
Moving forward
To tackle these current challenges, it is important that the industry adopts a multi-faceted approach, attacking the issue from all angles.
For example, fund managers must refine and be able to better articulate their valuation policies to all stakeholders – investors, auditors and regulators in particular.
Ensuring that these policies are transparent and comprehensive enough to consider unique current characteristics of different private assets is pivotal.
Additionally, it is important that fund managers enhance their internal independence by managing any conflicts of interest to maintain an unbiased approach to valuations.
To support this, fund managers should also look to leverage third-party valuation firms to get an objective perspective and significantly improve the overall credibility of valuations.
Third-party valuation firms offer streamlined workflows for front and middle-office teams, supporting investment and operations teams in efficiently utilising vital investment data.
This enables them to proactively monitor portfolios, conduct scenario analysis, automate valuations, and benchmark investment performance.
Through investment in high-quality technology and upholding these high standards, stakeholders can operate in a robust and valuable valuation framework for private assets. A framework that is fit for purpose and ready for the FCA review.
As fair value impacts asset allocation, which then drives returns, cash flow and internal rate of return, being able to estimate this requires consistent and highly experienced judgment. Therefore, it is crucial to partner with a reputable third party that can ensure credibility of the valuation process, further improving trust within the industry.
This joint effort ensures a sustainable and reliable approach to navigating the complexities of private asset valuation amidst the fluctuations of the market. It sets you at an advantage when the FCA ups compliance requirements.
