Leslie Uzan, Head of Private Equity and Debt at St James’s Place Wealth Management, discusses the recent paper published by the IFoA’s Private Assets Valuation Working Party.
Over the past decade, a growing number of institutions have been allocating to illiquid assets – private markets globally now stand at $11.7 trillion (McKinsey). This trend is expected to continue, with a number of UK asset owners anticipated to increase exposures to private asset strategies over the next 18 months (bfinance). The growing size of private market allocations brings risk management considerations, and requires investors and supervisory bodies to continue to evolve their asset oversight and monitoring frameworks.
Due to the nature of private asset investments, prices are not quoted or directly observable. This presents a challenge when trying to establish fair valuations for the assets. That’s why, as noted by PwC, ‘fair valuation of private equity investments, including strength and reliability of the valuation process, is an ever-increasing area of focus for investors, accounting standards setting bodies, auditors and regulators in the context of unprecedented market conditions and a challenging global economy’ (PwC). However, valuation oversight for illiquid assets is an area that has historically received less attention from asset owners, even though confidence in valuation estimates is critical for these institutions, especially for liability owners.
The IFoA’s Private Assets Valuation Working Party explores this topic in further detail in its recent paper Private Assets Valuation Oversight (183 KB PDF). The paper explores:
The paper also outlines some guidance (rather than formal recommendations) in terms of the governance and implementation of a robust valuation monitoring framework. Naturally, this information will need to be adapted by individuals and their firms to establish what is the most effective approach for their own portfolios and institutions, and to understand limitations associated with the chosen approach.
