As retail investors gain more access to private markets, industry leaders and regulators are increasingly focused on their protection.
At its December meeting, the SEC’s Investment Advisory Committee (IAC) hosted a panel discussion about “Mainstreaming of Alternative Assets to Retail Investors.” Industry representatives and academics shared insights and recommendations on several key concerns the SEC should address as retail investors pursue investments in private assets. One major issue was the lack of transparency and reliability of private asset valuations determined by fund managers. This is an important issue because asset values are often used to market fund performance, calculate fees charged by funds, and calculate the net asset value (NAV) of evergreen funds, which are funds that allow investors to trade periodically based on their reported NAVs.
Private Asset Values Come Into Focus
Panelists and committee members noted that identical securities held by multiple funds, such as equity in a private company or real estate holdings, can be valued significantly differently by each of those fund managers. This is not surprising, and in the absence of deliberate actions by managers to inflate valuations, variations in estimates are expected in private markets.
Unlike public markets, where securities are continuously traded and priced based on actual transactions, private market assets trade infrequently, so valuations are based on estimated prices at which a willing buyer and seller might agree upon. A useful comparison is residential real estate: while homeowners may estimate their property’s worth, when it comes time to sell a house, offers from prospective buyers can vary significantly, and sellers may choose not to sell if bids are too low. Similarly, the value of private assets, which often have unique attributes, is subject to industry trends, market dynamics, and buyer preferences, resulting in a wide range of potential outcomes.
Fund managers must periodically (typically monthly or quarterly) make a reasonable determination about the price they think they could, and would be willing to, sell their assets for at that time. Without the benefit of having price discovery through a robust M&A process for every asset for each reporting period, investors must rely on the manager’s good faith estimates.
Investors Face Greater Risks If They Trade Excessively
As discussed in the IAC meeting, investing through a registered vehicle with an independent board of directors can provide investors some assurance regarding the valuations they receive from their managers. Over time, investors can also examine whether a fund is able to sell assets at or near their stated values as further evidence of a manager’s valuation practices. However, these safeguards may not protect investors who actively trade registered private funds, as the risk of overpaying or selling at a discount increases with each transaction.
Steve was formerly the Chief Investment Officer and Head of Private Markets at Manulife Investment Management. In this role, he was responsible for leading global investment teams across a wide range of asset classes, including private equity and credit, real estate, infrastructure, timber, and agriculture. Steve has served as a director of many public and private companies during his career, including two of Manulife’s U.S. SEC-registered investment advisors.
Important Notice: Private Markets Navigator does not provide investment advice, and the information should not be construed as such. Investing in private asset funds is risky, with potential for total loss and long-term liquidity restrictions. Read our full dislaimer.