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The AMF examines the systems for valuation of the less liquid assets of UCITS and AIFs

The AMF examines the systems for valuation of the less liquid assets of UCITS and AIFs

As part of a Common Supervisory Action on the European level, the Autorité des Marchés Financiers (AMF) surveyed investment management companies on how they value the less liquid assets in their portfolios. The AMF performed inspections for 10 of them, invested in real estate assets or corporate bonds. In a summary document, it draws the lessons from this review.

Within the framework of a Common Supervisory Action coordinated by the European Securities and Markets Authority (ESMA), the AMF examined how a sample group of French investment management companies valued the less liquid assets (corporate bonds, real estate assets and unlisted equities) held in their portfolios. The purpose of this operation for the regulators was to ensure that the assets under management are valued correctly both in normal times and in times of crisis.

First, the AMF analysed the answers given to a questionnaire sent to some thirty investment management companies in the second quarter of 2022. It then carried out two series of short thematic inspections (SPOT inspections) to focus its investigation on 10 of those companies managing alternative investment funds (AIFs) and/or UCITS. Five firms were selected due to their specialisation in the management of real estate funds, and the other five for their significant investments in corporate debt issued by non-financial companies. Nine of the companies inspected address a client base of both professional investors and retail investors, and the tenth has exclusively professional clients.

During this review of the systems for valuation of less liquid assets over the period January 2019-July 2022, the AMF paid attention to:

  • the organisation and governance of these systems;
  • written procedures;
  • implementation of these systems;
  • internal control exercised over these systems.

The summary draws lessons from the answers given to the questionnaire and the SPOT inspections, and underlines very different organisations from one asset manager to another. These vary depending on the size of the company and the type of assets under management. 

Managers investing in corporate bonds of non-financial companies generally rely on the funds' external valuers and intervene to verify and confirm the net asset value proposed by the external valuer. Most of the real estate investment management companies, meanwhile, have set up valuation committees including several members of their teams (Risk, Asset Management, Compliance, senior management, etc.) and the independent valuer (internal), with these valuation committees working on the data sent by external valuation experts. In most management companies investing in unlisted equities (private equity), a collegial approach is preferred to decide on the valuation (via valuation committees, for example). In all cases, the final decision is up to the independent valuer.

In its examination of the written procedures, the AMF noted descriptions that are too general and not very detailed, particularly regarding the valuation methods or sources to be used.  

As regards the operational implementation of the valuation systems in the investment management companies studied, the valuation of real estate assets depends largely on external experts, with an uneven level in the traceability of valuation work, especially regarding the due diligence carried out by the internal valuer. In particular, the AMF noted formalisation shortcomings in the event of changes of valuation method. For some of them, the valuations adopted tend to be very stable, because the valuation methods used are based on prospective data not always specifically taking into account current market conditions, or on historical data. The AMF also underlines the lack of detailed information on the valuation process and methods used in the various investor information materials.

Regarding the managers of funds exposed to corporate debt, the AMF observed that the sources chosen for the prices were not indicated in the funds' prospectuses or annual reports. For 4 of the 5 firms inspected, sources not identified in the pricing policies were used without a sufficiently formalised justification, except for one of them. Only 2 of the 5 entities inspected used an internal model to value corporate bonds.

Regarding private equity fund managers, the AMF observed situations in which the investment management companies were not sufficiently proactive in scouting for information to update the valuation of the securities in the portfolio. In that case the funds show periods of an almost complete absence of volatility and leaps in valuation at specific dates, particularly at the end of the quarter or half-year.

In most of the cases during the AMF's review period, monitoring the valuation of the assets does appear clearly in the compliance and internal control plans. However, shortcomings were noted in the performance of this monitoring for some of the companies, including the absence of effective control, failure to comply with the planned monitoring frequency, monitoring of the valuation procedure consisting merely in verifying that it exists, a lack of comparison of selling prices with the valuation price, and problems of representativeness of the control samples.

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