Last month, the FCA confirmed it would undertake a review into private markets valuations later this year, with a focus on asset managers' discipline and governance over how assets are valued.
FCA chief executive Nikhil Rathi said that the regulator anticipates that an adjustment in private markets valuations will emerge in a higher interest rate environment, following the prolonged period of low interest rates and borrowing costs.
FCA actively monitors risks of private markets to financial stability
Although the full scope and timings of the review are not yet known, what has been reported so far indicates that the focus will be on who is responsible for valuations, how information is passed to the relevant committees and boards, and governance procedures in place.
Scottish Mortgage, which has a 30% allocation to unquoted companies, according to its latest factsheet, has welcomed the review, with SMT's commercial director Stewart Heggie noting that the trust has "always sought to have a clear process and robust governance throughout the valuations cycle".
Valuations in the private markets sector lag the public market due to a delay in reporting, meaning private assets do not have the consistent information disclosure requirements that public securities have in place.
FCA turns attention to private market valuations
Tony Alfonso, global head of valuation at Apex Group, said that private funds are facing calls for increased disclosure requirements, as well as for investments to be valued by an independent third-party to remove any biases in the valuations.
Heggie said Scottish Mortgage's accountability for valuations was segregated from the actual investment decision makers. Along with internal governance reviews, he said the involvement of PwC as a third-party valuer sets the trust in "good stead".
"Given much of the concern on valuations seems to be a lag and the fact that market corrections are not feeding into private valuations, we feel confident the proactive approach taken to avoid such a lag means we are well placed to respond to this review should we be required to," he added.
Greater disclosure and transparency
Unquoted companies have been an area of the Scottish Mortgage portfolio that has been under intense scrutiny this year from analysts, clients and a former board member.
The trust has sought to narrow its double-digit discount to net asset value by boosting its transparency and disclosure efforts on its private holdings, Heggie said. Last month, it published a deep dive into its top ten private holdings, which was welcomed by analysts.
During the first six months of the year, 76% of the trust's unlisted holdings were valued over five times, with 871 revaluations carried out across the more than 50 holdings in six months, triggered by transactions and market multiple moves.
Scottish Mortgage top ten unlisted holdings deep dive reassures analysts
This was a marked increase from 2022, when the trust conducted 350 re-evaluations in the opening six months of the year.
"There may well be a difference between perception and reality where people are concerned about valuations," said Heggie. "But as soon as they see the data on our valuation process and the top ten deep dive, that gives them all the information and comfort they require."
Concerns over outdated valuations have hit private equity investment trusts hard in the last year, with the sector currently trading at discounts to NAV close to historic highs. Excluding 3i, the AIC Private Equity sector is currently trading at an average 35.7% discount.
Dan Boardman-Weston, chief executive of BRI Wealth Management, said more private equity trusts should increase their valuation process disclosures, as that could help narrow down the sector's deep discounts.
"There is no reason that investment trusts that invest in private assets cannot be more open and transparent about how these assets are valued," he said. "I think that has been a fear for people, and there is no reason why boards should not be pushing for greater transparency."
Boardman-Weston noted that most private asset investment trusts have marked down the value of their assets quite significantly over the last two years.
"If we were sitting here today, talking about these big discounts and asset values staying at 2021 levels, I think it would be a very different conversation. Trust in the sector would have diminished a lot," he said.
"But a lot of trusts have been very active in valuing down assets, as you would expect, because the world has changed a lot for the worse over the last couple of years."