Fair Valuation Pricing Survey, 24th edition

As investment in private equity and private credit becomes more prevalent in mutual funds and garners even more investor interest and regulatory scrutiny, fund groups should focus on strengthening the valuation operating model with a focus on policies and procedures. This includes establishing appropriate checks to capture any necessary valuation adjustments to account for credit deterioration, as well as maintaining robust oversight of external specialists, including their methodologies, documentation, and technology. Ultimately, the priority should be a scalable and well-governed process that preserves consistency, transparency, and professional judgment. As private-market exposure grows, fund groups aim to effectively manage the valuation risk created by the increased complexity.

Against a backdrop of continued private-market growth, evolving investment strategies, and rapid technological advancement, the SEC is broadening its regulatory focus. While established priorities remain significant, such as compliance programs and new rule implementation, there is also an emphasis on complex and less liquid investments, private credit, cybersecurity, AI, and the controls supporting increasingly sophisticated operating models. This expanding agenda reflects the need for fund groups to demonstrate that their governance and valuation models, valuation practices, risk management framework, and compliance programs are keeping pace with market innovation, increased complexity, and heightened expectations related to investor protection.

As an industry, fund groups continue to explore the role that technology plays in the governance and valuation operating models. In past editions of our FV survey, conversations about technology may have centered on spreadsheet tools, data analytics, data lakes, and data visualization tools, to name a few. However, momentum related to adoption of those tools has plateaued. What is taking their place and energy is the widespread and growing focus on AI—the seemingly limitless potential use cases, as well as the complexity, questions, and risks AI use cases inevitably raise. As may be expected in the current climate, FV survey participants signal a shift toward considering AI in the valuation operating model.

As noted in previous editions of this survey, the implementation choices made in the course of adopting the requirements of Rule 2a-5, including the design of governance arrangements and Board reporting, have now largely been memorialized in established frameworks. Critical to the adoption of Rule 2a-5 was the close collaboration with fund groups and their Boards to ensure expectations were agreed to and met, and Boards could comply with the SEC’s prescription that Boards perform active oversight over the valuation process. Consequently, the focus has shifted to targeted refinements based on the evolution of valuation risks, portfolio complexity, and regulatory expectations.