With some investors unable or unwilling to invest in long-term assets that could meet their investment goals, the Financial Conduct Authority created the long-term asset fund (LTAF), a category of open-ended funds, in 2021.
Two years later, the regulator recategorised a unit in an LTAF to a "restricted mass market investment", so that mass market retail investors, self-select defined contribution pension schemes and self-invested personal pensions could invest into an LTAF.
That same year saw the launch of the UK’s first LTAF by Schroders Capital, a specialist private markets investment division, for UK pension fund investors. Its specialist renewables and energy transition infrastructure manager, Schroders Greencoat, followed with another LTAF for UK institutional investors in 2024.
Others, including Aviva Investors, WTW and Legal & General have also launched LTAFs.
What’s next from the regulator on private assets?
Meanwhile, the FCA’s work around private markets continues this year, having announced in a March portfolio letter that it would conduct a multi-firm review of valuation practices for private assets.
“Private markets have been an area of increasing focus at the FCA,” says Mark Watts, investment partner at LCP, a consultancy. “Hitherto, activities and resources had been deployed to look at harms that more directly affected consumers.
“The rise in the absolute size of private markets and the potential for systemic issues to arise from that size has prompted closer attention.
“Higher levels of potential consumer harm also come from the defined benefit market, where private investments are now a higher portion of DB portfolios since the gilt crisis, and in the DC market where LTAFs now facilitate investment into private markets.”
Indeed, in its portfolio letter the FCA said that as more investors seek access to private markets, it is vital they can trust that valuations are “robust and reliable” in all market conditions.
“In a worst-case scenario, poor valuation practices can lead to real losses for investors; for example, if they find out too late that assets have been overvalued,” says Adam Sutton, a valuations partner at Grant Thornton, a financial and business advisory firm.
And current expectations of firms when it comes to valuing private assets vary considerably, he says.
“Firms applying best practice are performing valuations in line with the International Private Equity and Venture Capital Valuation (IPEV) guidelines, but this is not mandatory.”
Abi Reilly, funds practice lead at Bovill Newgate, a regulatory consultancy, says that while many firms use the IPEV guidelines, there are different approaches.
“You can have a discounted cash flows approach, a replacement cash approach, or the so-called market approach, which uses multiple sources around industry benchmarks, available market prices, prices of the last recent investment, etc” she says.
In terms of what robust and reliable valuation practices for private assets can look like, one of the things that Reilly highlights is the importance of a valuation policy.
“You can't do it on the run and change your view according to the weather. The basis on which you're doing it needs to be set out. And if you change that basis, then you should think about how you inform investors, and who authorises that change.
