The Financial Conduct Authority is set to probe the way investors value the private assets on their books as it continues a deepdive into the liquidity of the market in the UK.
The deep-dive from the City watchdog will be an offshoot of its investigation into liquidity in the asset management sector launched last year, City A.M. understands.
This was triggered by a cash crunch facing investors in the wake of Liz Truss’ disastrous mini-budget.
Private assets are harder to offload quickly, meaning that a rush of redemptions can squeeze some firms cash supplies. Regulators have been looking to boost liquidity in the market to prevent a similar crisis in future.
While the scope of the latest deep-dive is yet to be drawn, it will reportedly look at the “disciplines and governance” over valuations, the Financial Times reported.
The deepdive would reportedly include scoping out who is accountable for valuing the private assets of a firm, what procedures are in place, and how information is passed to management, the FT reported, citing a person close to the discussions.
The new deep-dive is set to be kicked off by the FCA by the end of the year, the FT reported.
Investors currently mark the value of their private holdings internally and often on a quarterly basis, meaning that assets may face sharp swings between valuations. Fund managers also have sway over how the assets are valued.
The fresh review follows a warning shot fired at the industry in July when the regulator found that firms liquidity management was coming up short.
Some plans to deal with rapid redemptions “lacked coherence when viewed as a full process and were not always embedded in daily activities,” the FCA wrote in a letter to asset management chiefs in July.
Richard Olson, head of the UK and European valuations practise at investment bank Lincoln International said the move to review the market would be a welcome step as firms increasingly borrow against the value of their portfolios.
“The FCA stressing the need for proper independent valuations and now stating that it intends to investigate alternative asset managers is a wake-up call for alternative asset managers, particularly smaller scale funds — it may even push some smaller funds toward full outsourcing or M&A to larger platforms,” he added.
Nervous investors yanking money from the market spurred a series of warnings over the threat that illiquid assets pose to financial stability.
The International Monetary Fund warned last year that funds with less-liquid holdings “have a major potential vulnerability” and a run from investors could “amplify”shocks and “undermine the stability of the financial system”.
The International Organization of Securities Commissions has similarly warned that private markets could be face “hidden risks” that will be revealed by the strain of higher interest rates.
““When you combine that kind of vulnerability with a lack of transparency, and a changing macro-financial environment, you have a cause for concern,” Iosco chair Jean-Paul Servais told the Financial Times.
The FCA declined to comment.