The Financial Conduct Authority (FCA), the UK’s financial regulator, is set to examine potential conflicts of interest among managers of private equity and private credit funds, according to a report by the Financial times.
The report cites the FCA as a saying in a letter sent to asset management firms, that it has concerns about the risk of “poorly managed conflicts of interest” within the private asset management industry, and indicating that it would launch a review this year focused on how firms handle these conflicts.
The regulator highlighted that conflicts may arise when firms operate across multiple interconnected business areas, including continuation funds, co-investment opportunities, or when partnering with other financial institutions.
The private equity and credit sectors have expanded rapidly in recent years, drawing in some of the largest asset managers and banks, many through acquisitions, partnerships, and strategic shifts, and becoming increasingly complex in the process.
Concerns have been raised about the potential for fund managers to manipulate asset valuations due to the lack of daily trading on public markets with the FCA warning that such practices could benefit fund managers at the expense of investors.
The regulator is also nearing the release of findings from a previous probe into valuation practices within the private asset market and has urged firms to ensure their valuation processes are robust and properly governed, with clear audit trails.
The regulator has also stressed the need for firms to update and refine their procedures for identifying, managing, and mitigating conflicts of interest, particularly as private markets expands.
Firms will be assessed on how they implement their conflict-of-interest frameworks through governance structures and reviews to ensure that investor interests are not compromised.
