2024 Fair Valuation Pricing Survey

Navigating complexity, technology, and regulatory headwinds

Valuation remains a critical focus across the investment management industry, with over 100 fund groups participating in Deloitte's annual Fair Valuation Pricing Survey for the second year in a row.

Two years after adopting Rule 2a-5, the industry continues to feel its impact. Fund groups have reflected on changes to valuation policies, technology, and board reporting, and survey results suggest that it's time to build and strengthen the valuation operating model, with a pointed focus on benchmarking against peers while also preparing for shifts in the industry. Unique valuation challenges emerge within asset diversification, including private credit, cryptocurrency, and more. Fund groups must adapt existing policies to ensure accurate valuations, so that they can optimize portfolio performance and maintain investor confidence.

Continued evolution of Rule 2a-5

With Rule 2a-5, the implementation and oversight of valuation models by fund groups is always shifting. By enhancing governance structures, conducting rigorous testing, developing comprehensive policies, and improving board reporting practices, fund groups are working to ensure the accuracy and reliability of asset valuations. This ongoing evolution reflects the industry's commitment to maintaining high standards of transparency and integrity in the valuation process. The survey captures how various fund groups evaluate their valuation models and determine whether changes or adjustments are needed. The ever-evolving Rule 2a-5 requirement for a valuation risk assessment continued to mature in this year's survey, with fund groups dedicating more time to identifying risks in their valuation process.

Enhancing the valuation operating model via technology

Survey results show the industry is clearly trending towards adopting and increasing the use of technology in valuation operating models. Over the past three years, there has been a maturing trend in the use of technology within valuation operating models, with increases across all categories except robotic process automation. 54% of participants reported initiating or expanding their use of at least one form of technology in the past year. Additionally, survey results also highlighted the increased use of workflow management tools. Nine fund groups reported either implementing or expanding their use of these tools to automate their entire end-to-end valuation process.

The survey also points out that technology adoption spans fund groups of all sizes, with over 95% of participants indicating their group used at least one of the technologies listed in the report. Fund groups with AUM between $51 billion to $100 billion and between $101 billion and $500 billion are leading the pack when it comes to implementation and enhancement of technologies. On the other hand, larger fund groups with over $500 billion in AUM lead in general technology use, with more than 60% utilizing data lake/data management, workflow, and data analytics tools. 

Increasing complexity and regulator focus

Many fund groups are grappling with rising complexity due to the evolving dynamics of private equity (PE) and private credit. As PE firms diversify their strategies and expand globally, deal structures and valuation methodologies have become more sophisticated. Simultaneously, the emergence of private credit as a significant asset class has introduced additional layers of valuation and financial reporting challenges. These developments are compounded by an increasingly stringent regulatory environment, where compliance requirements and oversight mechanisms are continually evolving to address the complexities of modern financial markets. This confluence of factors demands that fund groups and mutual fund directors respond swiftly and adaptively to effectively manage and oversee the valuation operating model.

This year's FV survey provides insights into the current practices and trends among fund groups investing in private equity. Valuation remains challenging due to the illiquid and complex nature of private equities and the difficulty in accessing all relevant information, including:

• Valuation approaches and methods used
• Frequency and format of valuations
• Use of external specialists
• Oversight and due diligence procedures over external valuation providers

Additionally, the survey explores the emerging asset class of private credit, which has seen increased usage among fund groups.

Fund governance model solidified

Last year, questions arose about how the implementation of Rule 2a-5 would influence Board oversight and the governance model of funds. Specifically, there was curiosity about whether Boards were satisfied with the initial implementation and whether there would be a shift towards a risk-based oversight approach. Additionally, there was speculation on whether this shift would lead Boards to spend less time on valuation matters.

Now, two years after the adoption of Rule 2a-5, the changes have largely stabilized. 

• 82% of participants reported that the amount of time spent on valuation by the Board(s) remained the same compared to last year.
• 13% of participants noted an increase in the Board's time on valuation topics.

These numbers indicate that Boards have largely settled on a comfortable level of monitoring and reporting from management. Furthermore, 98% of participants reported no change in the frequency of the Board's oversight process, suggesting a stable and consistent approach to governance post-Rule 2a-5 implementation.

Looking ahead

In today's business landscape, discussions about AI-based technology and its future impact on the workplace are ubiquitous. Whether enhancing day-to-day productivity in human resources or generating AI capabilities for content creation, AI's potential is vast. While its full potential remains to be seen, AI can already provide significant efficiencies in the valuation process. This includes generating documentation, obtaining and summarizing research, and even generating valuations for private equity or debt positions. The valuation operating model stands to benefit greatly from these advancements.

However, despite the promising possibilities, technologies are not infallible. Human oversight remains essential to ensure that the output from any technology aligns with the facts and circumstances at hand. Therefore, continued investment in human capital is crucial to maintain effective oversight of these technologies.

About the 2024 Fair Valuation survey

We conducted the FV survey in late spring/summer 2024, and participants representing 103 registered investment company fund groups completed it. FV survey participants included small, midsize, and large fund groups. Thirty-one percent of them have more than 100 funds within the fund group, and 29% have less than 15 funds. Approximately 15% of them managed mainly equities, 6% managed mainly fixed-income securities, and the remainder managed a balanced array of strategies. Percentages reported are generally based on the number of survey participants responding to the specific question unless otherwise noted.