SBAI releases new consultation on valuation standards for private market asset managers

The Standards Board for Alternative Investments (SBAI), custodian of the Alternative Investment Standards, has announced that it has published a new consultation paper (CP5), containing proposed new standards related to valuation of private market assets.

According to the announcement, SBAI’s proposed changes aim to ensure that the Standards “remain relevant and aligned with developments across the alternative investment industry, specifically in relation to illiquid assets.”

“This includes Standards which seek to introduce a consistent framework for assessing the quality of the valuation processes used by alternative investment managers, whilst enhancing transparency and disclosure provided to institutional investors,” SBAI commented.

For those unaware, the SBAI has a range of standards relevant to insurance-linked securities (ILS) investments, including what the organisation calls its Insurance Open Protocol, which has existed since 2017 and been adopted by a number of players within the ILS manager community.

Last July, the SBAI updated its Insurance Open Protocol reporting template for ILS and reinsurance linked investment funds.

Furthermore, the SBAI’s new consultation paper explains the importance of the valuation process for ILS investments and funds, particularly in relation to side pockets.

The practice of side-pocketing is commonly used in ILS fund management, as a way to segregate potentially loss impacted or distressed assets from the rest of a fund portfolio.

Side pocketing of assets can occur for a variety of different reasons, such as on or around the time the relevant asset is purchased, as well as on or around the point at which the relevant asset becomes hard-to-value.

“The SBAI concurrently publishes new guidelines on governance, transparency, and disclosure in private market valuations. This guidance is designed to educate allocators and investment managers on good valuation practices, addressing a range of valuation methodologies, as well as the variability and subjectivity that can arise in private market valuation processes,” the SBAI added.

The guidance also provides practical advice on how both investors and managers should assess the role of third-party service providers in supporting valuation processes, while also addressing the risks of overreliance and failure to conduct adequate due diligence.

Mario Therrien, SBAI Chair, commented: “In recent years, private market valuations have been a source of uncertainty for investors, and the release of these guidelines marks a critical milestone in improving transparency and trust within the industry. Private markets are complex, but this guidance provides a roadmap to ensure that investors understand the key factors that influence valuations, including the role of third-party providers. I am proud of the collaborative efforts that have gone into this work at the SBAI.”

Paula Volent, SBAI Trustee, Vice President and Chief Investment Officer at Rockefeller University, said: “As an endowment, we have identified valuation risk as a key concern. These guidelines are a crucial step in providing clarity on how managers and service providers formulate valuations. By improving transparency and establishing clearer disclosure practices, the guidelines help ensure that we, and other institutional investors, can make more informed decisions based on a stronger understanding of the assumptions and methodologies driving these marks.”

Stuart Fiertz, SBAI Trustee, Co-Founder, President, and Director of Research at Cheyne Capital Management, added: “Transparency and mutual understanding are key to building trust in private markets. These guidelines are an essential step in ensuring that investors feel confident in the valuations they rely on.”

Chris Gradel, SBAI Trustee, Chief Executive Officer and Co-Founder at PAG, said: “These proposed Standards represent a balanced approach between increasing transparency and disclosure for investors, whilst maintaining operational flexibility for managers.”

Marta Klein, Veteran ODD Practitioner at a large SWF, SBAI Private Market Valuation Working Group Member, commented: “Transparency in the valuation process fosters a stronger partnership between managers and investors, leading to a more informed investment community. These guidelines provide investors with the tools to assess valuations accurately and understand where subjectivity may influence the outcomes.”

Nicolas Konialidis, Technical Director of the Business Valuation Board at the International Valuation Standards Council (IVSC), noted: “Private market valuations require careful judgment and clear communication to ensure trust and confidence among stakeholders. The SBAI’s efforts to strengthen governance and disclosure are aligned with the IVSC’s broader mission to promote consistent and transparent valuation practices across all asset classes. The SBAI’s initiative contributes to a more robust and informed investment ecosystem.”

Ryan McNelley, Managing Director at Kroll, added: “Third-party service providers can play a crucial role in supporting private market valuations. This guidance highlights that not all service providers are created equal, the range of services available and the sophistication and reputation of teams undertaking valuations should be a key concern for investors.”