UK review of private markets to focus on valuing assets

By Huw Jones

LONDON (Reuters) – Britain’s financial regulator said on Wednesday that its review of risks in markets for unlisted assets would check how valuations are being undertaken, and whether any risks could spread into banking.

Stock markets and prices of government bonds have been hit by expectations of higher interest rates for a longer period than initially anticipated. Prices of private, unlisted assets have remained relatively high, raising questions about how valuations are conducted and if a reckoning is due.

Financial Conduct Authority (FCA) Chief Executive Nikhil Rathi said an adjustment in private markets for higher interest rates after a prolonged period of low borrowing costs is likely to show itself eventually.

“At some point you might expect that risk will crystallise in valuations of assets. Those valuations of assets could be assets like commercial real estate, and we know what’s happening in China,” Rathi told reporters. He was referring to an unprecedented liquidity crisis in China’s property sector which makes up a quarter of the country’s economy.

Private markets include debt and equity that is not publicly traded or listed, real estate and infrastructure.

“We’ve also seen over a number of years, the growth of private markets, the growth of private equity, and the use of leverage in those markets,” he said.

The FCA is looking at how such risks are managed by participants in private markets to understand where risk might have built up, how valuations are governed, and how that might feed back into other parts of the financial system, such as banking, Rathi said.

“Private markets in particular are challenging because different jurisdictions have different powers of information collection around those markets, some can reach into them, others can’t,” Rathi said.

The work is the latest sign of how regulators are digging deeper into the role of non-banks, such as funds and private equity firms that are vehicles for private markets, that now make up about half the world’s financial sector.

The FCA is working with other regulatory bodies, such as the global Financial Stability Board (FSB) to identify data gaps which need to be addressed internationally, he added.

The FCA’s executive director for markets, Sarah Pritchard, who also co-chairs a workstream at the FSB on leverage in the non-bank sector, said the work has just begun to look at where future risks in non-banks may lie in relation to leverage, with a focus also on the data needed to spot risks properly.

(Reporting by Huw Jones; Editing by Bernadette Baum)