Kroll’s Insights and Implications from the FCA's Review of Private Fund Market Valuation Practices

The Financial Conduct Authority (FCA) has recently concluded a review of valuation practices within the UK's investment funds sector, surfacing significant observations that are poised to have some ramifications the industry. The release of the findings sparked discussions among dozens of private fund managers, who gathered at a breakfast briefing hosted by Kroll in London to delve into the implications of the FCA's conclusions.

The overarching message from the FCA's was clear: there is a need, in some corners of the industry, for a more comprehensive and independent governance process surrounding valuation practices. In essence, the FCA identified that whilst the majority of fund managers operate with a reasonably sound process, there are notable areas that require enhancement. Specifically, a subset of managers must elevate their practices to align with the industry standards, and some funds need to be ready to handle emerging and evolving requirements, such as adhoc valuations. The FCA emphasizes that this need for improvement is not a reflection of negligence, but rather an opportunity for the industry to bolster its overall integrity and efficacy.

Genuine Efforts Belie Difficult Questions

Notably, the FCA acknowledged the genuine efforts by most managers to achieve robust valuation governance. However, the inherent subjectivity of valuation poses significant challenges. Questions such as "How much is enough?", "How robust do I need to be?", "How can I achieve appropriately robust valuation governance while being cost efficient?", and "How can I meet investor and regulator expectations in a time-efficient manner?" remain difficult to answer and were surfaced at the breakfast briefing.

To tackle these challenges, the FCA suggests in its review the implementation of more consistent valuation practices that can be universally adopted across the industry. This would involve the development of clear and more commonly accepted best practices that provide a framework for managers to follow. By doing so, the FCA hopes to minimize the discrepancies and ensure that all managers are working towards a common goal of transparency and reliability in their valuations.

The review further highlights the need for a more structured and independent approach to valuation governance within the UK investment funds sector. By addressing the inconsistencies and ambiguities that currently exist, the industry can move towards a more robust and reliable valuation process that meets the expectations of investors and regulators alike. The findings from the FCA's review are not just a call to action but a roadmap for enhancing the integrity and efficiency of valuation practices across the sector.

Taken as a whole, the FCA's findings underscore the importance of establishing clear and consistent valuation standards that can guide managers in their efforts to provide accurate and reliable valuations. This involves not only refining existing processes but also ensuring that these processes are independent and free from potential biases that could compromise their integrity. The FCA also highlights in its Review the need for continuous education and training for fund managers to keep them abreast of the latest developments and best practices in valuation governance.

Collaboration and Third-party Input Are Essential

As the industry navigates these changes, fund managers are encouraged to engage in proactive dialogue and collaboration, sharing best practices and insights to foster a more unified approach to valuation governance. The FCA's review serves as a pivotal moment for the sector, offering an opportunity to reassess and strengthen the frameworks that underpin valuation practices. By fostering a culture of transparency and accountability, the industry can build greater trust with investors and regulators alike.

Furthermore, the FCA calls for greater involvement of independent third parties in the valuation process. This could include the use of valuation experts who can provide an unbiased perspective and help identify areas for improvement. By incorporating independent oversight, fund managers can enhance the credibility and reliability of their valuations, thereby boosting investor confidence.

The FCA's recommendations are expected to have far-reaching implications for the industry. Fund managers will need to reassess their current practices and make the necessary adjustments to align with expectations. This may involve investing in new technologies or systems that can streamline the valuation process and improve accuracy. Additionally, managers will need to allocate resources for training and development to ensure that their teams are well-equipped to navigate the evolving landscape.

Ultimately, the goal is to create a more resilient and trustworthy investment funds sector that can withstand market fluctuations and deliver consistent value to investors. By adopting a comprehensive and independent approach to valuation governance, the industry can enhance its reputation and foster long-term growth. The FCA's review serves as a crucial step in this journey, providing the insights and guidance needed to drive meaningful change.