The International Organization of Securities Commissions released its final report on the valuation of Collective Investment Schemes in June, replacing frameworks first published in 2007 and 2013. The overhaul responds to the rapid growth of private markets, increasing retail access to previously institutional asset classes, and lessons learned from periods of market stress. The updated recommendations arrive at a time when private equity, private credit, infrastructure and other less liquid assets account for an increasingly important share of global investment portfolios, while retail investors gain access to those markets through new fund structures and exchange-traded products.
Private Markets Reach $9 Trillion as Valuation Complexity Increases
Global private equity assets now exceed $9 trillion, while private debt has grown into an asset class worth roughly $2 trillion. Infrastructure, private real estate and other alternative assets have attracted substantial institutional allocations as investors search for returns outside traditional public markets. IOSCO notes that in recent years there has been an increase in collective investment schemes holding less liquid and illiquid assets, including private assets. The organization said those developments heighten investor protection concerns and increase the importance of robust valuation practices. Unlike listed equities, where prices are continuously updated through market transactions, private assets often rely on valuation models, assumptions and comparable transactions to determine their worth.
Retail Investors Access Private Assets Through ELTIFs and LTAFs
Retail investors have gained greater exposure to private market strategies through regulated fund structures. IOSCO specifically references European Long-Term Investment Funds in the European Union, Long-Term Asset Funds in the United Kingdom, and other authorized open-ended vehicles that allow retail exposure to private assets. Retail investors typically lack the resources available to large institutions when evaluating private investments. As a result, they depend more heavily on fund managers and valuation processes to determine whether a fund's net asset value accurately reflects the worth of its underlying holdings. According to IOSCO, accurate and reliable valuation is central to investor protection, market integrity and financial stability. The report states that inaccurate valuations can cause investors to pay too much when entering a fund or receive too little when exiting, potentially diminishing returns and undermining confidence in investment products.
COVID-2020 Market Stress Exposed Corporate Bond Valuation Weaknesses
Certain corporate bond markets became less liquid during the turmoil of 2020, making valuation more difficult. In some cases, even traditionally liquid markets experienced disruptions in price discovery as uncertainty spread through financial markets. The report warns that valuation challenges become more pronounced when liquidity deteriorates. Assets that can normally be sold without difficulty may become harder to value, while differences between theoretical prices and actual executable prices can widen considerably. In severe cases, valuation problems can create what regulators call a first-mover advantage. Investors who redeem early may receive prices that do not fully reflect deteriorating market conditions, leaving remaining investors to absorb subsequent valuation adjustments. Those concerns explain why the updated recommendations devote greater attention to governance during stressed market conditions, valuation reviews and procedures for addressing stale or inaccurate valuations.
IOSCO Identifies NAV-Based Fees and Performance Compensation as Conflict Risks
The report identifies several situations where incentives may influence valuation outcomes. Fund managers whose fees are linked to net asset values may benefit from higher valuations. Performance-based compensation structures can create similar incentives. Related-party transactions, asset transfers between affiliated entities and marketing efforts that highlight unrealized gains may also introduce conflicts. The organization recommends that managers identify, document, monitor and manage conflicts throughout the valuation process. Where conflicts cannot be adequately mitigated, IOSCO recommends appropriate disclosure in accordance with local regulations. The report also devotes considerable attention to independent oversight, valuation committees and governance structures designed to reduce the risk of undue influence over valuation decisions.
ETFs Remain in Valuation Framework Scope Despite Secondary Market Trading
Most ETF investors trade shares on secondary markets rather than directly with funds. Nevertheless, the calculation of net asset value remains important because it supports the arbitrage mechanism that helps ETF market prices remain close to the value of underlying assets. Incorrect valuations can disrupt that process. If the reported value of the underlying portfolio is inaccurate, ETF shares may trade at larger premiums or discounts, reducing market efficiency and potentially harming investors. For that reason, the organization decided ETFs should remain within the scope of the revised framework, while recognizing certain differences between ETFs and traditional open-ended funds.
FAQ
What did IOSCO release in June?
The International Organization of Securities Commissions released its final report on the valuation of Collective Investment Schemes in June, replacing frameworks first published in 2007 and 2013.
Why did IOSCO overhaul its fund valuation recommendations?
The overhaul responds to the rapid growth of private markets, increasing retail access to previously institutional asset classes, and lessons learned from periods of market stress including the COVID-2020 turmoil.
How do retail investors access private assets according to the report?
Retail investors gain access through regulated fund structures including European Long-Term Investment Funds in the European Union, Long-Term Asset Funds in the United Kingdom, and other authorized open-ended vehicles that allow retail exposure to private assets.
