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Private market investments

Supervisors shine spotlight on controls in bid to uncover hidden risks

Back to Regulatory Outlook 2024

The last decade has seen rapid growth in private market investments (Figure 1), attracting the attention of governments and regulators. Governments are keen to facilitate greater investment in long-term, productive assets and have put in place a range of measures to do so, most notably increasing opportunities for investment by defined contribution (DC)1 and defined benefit2 pensions, the Mansion House Compact3 and the Long Term Asset Fund (LTAF)4 in the UK, and the European Long-term Investment Fund Regulation (ELTIF II)5 and a new regime for loan origination funds6 in the EU.

At the same time, supervisors are alert to the risk of inaccurate valuations, conflicts of interest, poor liquidity and leverage controls, mis-selling and greenwashing risks. The International Organization of Securities Commissions (IOSCO) has warned7 that higher interest rates could increase defaults and threaten valuations in this relatively opaque market. Regulators are calling for more transparency in private markets8 as part of the policy debate on non-bank financial intermediaries (NBFI). Taken together, we expect this to result in a step change in the level of supervisory scrutiny of this sector in 2024. Private markets firms will need to invest significantly to ensure that risk and compliance functions are appropriately resourced and that they have robust control frameworks and operational processes.


Valuations are in the supervisory spotlight. In the UK, the Financial Conduct Authority (FCA) is conducting a review of valuation in private markets, while in the EU, the European Securities and Markets Authority’s (ESMA) recent Common Supervisory Action (CSA) on valuation9 highlighted particular risks for private equity and real estate assets. Key concerns include subjectivity and potential conflicts of interest in the valuation process, and misalignments between the frequency of the net asset value (NAV) calculation, the asset valuation, and the availability of up-to-date data. Accurate valuations are especially important if investors can exit the product early or trade it in the secondary market.

In our view, firms should particularly focus on governance, which should provide challenge at key stages of the valuation process, from the methodology used, to the validity of the inputs, and the reasonableness of material judgements used to determine valuations. This challenge needs to be independent and to have the right level of seniority and expertise. Some firms are considering greater use of third-party valuers – this can provide more independence but firms should be aware that it does not absolve them of responsibility.

We think that governance committees should ensure that the assumptions behind valuation models are robust and periodically back-tested and that firms use high quality data as inputs. It will also be important for the valuation process to be clearly documented, and for individual responsibilities to be set out clearly, including for senior managers subject to the Senior Managers and Certification Regime. Although not applicable to investment managers, the PRA’s principles for model risk management10 provide a good starting point for model governance.

Private credit


Private credit markets – which globally grew from less than USD60 billion in 2002 to over USD1.3 trillion in H1 202211 – will face their first big test at their current size, as more challenging market conditions and higher interest rates are likely to lead to more borrowers in difficulty. Private credit managers will therefore need to ensure that they have sufficient arrangements for working with borrowers to enforce covenants and solve financing issues before they become more significant, particularly for loans that are not sponsored by a private equity firm. Rising defaults may also prompt supervisors to question firms on their liquidity and leverage controls, given the current focus on how hidden leverage can transmit risk across the financial system.

Rising defaults may also prompt supervisors to question firms on their liquidity and leverage controls.

EU managers of private credit funds will need to consider their business strategy in light of the Alternative Investment Fund Managers Directive’s (AIFMD) new harmonised regime for loan origination funds. This creates new opportunities for these funds to lend on a cross-border basis across the EU, which will make it easier for managers to scale their operations. Nevertheless, the new regime introduces some significant new requirements which will reduce flexibility for managers, including leverage limits, risk retention requirements and a requirement to have a closed-ended structure unless they can demonstrate appropriate liquidity management practices for an open-ended structure. Funds that do not currently meet these requirements will need to review their investment strategy and/or structure to ensure they remain attractive to investors.

Retail investment

As more managers seek investment from retail investors (including DC pensions and wealth clients), supervisors are increasingly focusing on conduct risks. In the UK, we expect the Consumer Duty (‘the Duty’) to be a key area of supervisory focus. As part of its work on the Duty, the FCA recently raised12 concerns that wealth managers have exposed consumers to inappropriately high-risk or complex investments, that execution-only stockbrokers have promoted products that are too complex to understand, and that consumers can be unaware of high fees that significantly reduce their investment returns. Firms will need strong controls across their marketing, distribution and product functions to mitigate these risks.

Similarly, DC pension schemes increasing their investment in unlisted assets under the Mansion House Compact will need to ensure their members understand the risks, that the investments deliver value net of fees, and that they revisit the rationale for their asset allocation periodically. We think that conduct considerations are likely to slow the uptake of increased private markets allocations in 2024 as DC pension schemes will need to consider each investment carefully. For example, the government’s own analysis13 shows that the value for investors depends significantly on the level of fee discounts that pension schemes can negotiate. In addition, the fact that global private equity dry powder reached a record USD 2.69 trillion in December 202314 suggests that good investment opportunities may take time to find.



According to Deloitte’s ESG in Private Capital Survey 202315, which sought insights from 69 individuals across 61 UK private asset investors (including both General Partners (GPs) and Limited Partners (LPs)), UK private asset investors are committed to integrating ESG factors into investment decisions, with 91% already having ESG policies in place. The survey also found that the approach to ESG is currently largely driven by LPs’ views rather than by regulators.

SDR compliance will be a particular challenge for private market firms due to the lack of availability of ESG data from private companies.

This dynamic is very likely to change in the UK with the FCA’s Sustainability Disclosure Requirements (SDR) published at the end of 2023. Prescriptive requirements underpinning the use of sustainable investment labels alongside strict marketing restrictions mean that firms may need to consider the viability of their sustainability ambition in light of increased regulatory and reputational risk. SDR compliance will be a particular challenge for private market firms due to the lack of availability of ESG data from private companies. To mitigate greenwashing risk, firms will need to take the lead in ensuring that private companies have the right arrangements to produce high-quality ESG data – they can leverage regulations that require corporate disclosures i.e. the Corporate Sustainability Reporting Directive (CSRD) for EU (and some non-EU) companies, and the UK’s upcoming Sustainability Disclosure Standards (SDS). Since ESG data is a key source of greenwashing risk, it is crucial for firms to identify gaps in ESG data in order to manage their own reputational and liability risk, and to produce accurate disclosures. Separately, firms subject to the Task Force on Climate-related Financial Disclosures (TCFD) reporting deadline of June 2024 should ensure that they pro-actively document how they identify and manage climate risks and opportunities in their portfolios – seeking climate related data from private companies at short notice is likely to be challenging.


While the expansion of private market investments creates significant new opportunities, firms will need to ensure that they have robust processes and controls and that their risk and compliance functions are appropriately resourced as they grow. In 2024, we expect a particular supervisory focus on valuation, private credit, protections for retail investors and greenwashing risk. EU managers of private credit funds will also need to make important decisions about their business model ahead of the implementation of AIFMD II.

  1. PRA, Review of Solvency II: Reform of the Matching Adjustment, September 2023, available at
  2. FCA, Advice Guidance Boundary Review – proposals for closing the advice gap, December 2023, available at

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