ESMA report on valuation of UCITS and open-ended AIFs

On 24 May 2023, ESMA published its final report on the 2022 Common Supervisory Action ("CSA") on valuation of UCITS and open-ended AIFs ("ESMA Final Report").

As a reminder, the aim of the CSA launched in 2022 was to assess compliance of supervised entities with the relevant valuation-related provisions in the UCITS and AIFMD frameworks, in particular the valuation of less liquid assets (e.g. unlisted equities, unrated bonds, corporate debt, real estate, high yield bonds, emerging markets, listed equities that are not actively traded, bank loans).

The various actions and assessments carried out in the framework of the CSA on valuation were intended to lead to greater convergence in the approach of National Competent Authorities ("NCAs") to the supervision of valuation-related issues.

The ESMA Final Report finds room for improvement in the following areas:

• appropriateness of valuation policies and procedures;
• valuation under stressed market conditions;
• independence of the valuation function and use of third-party valuers;
• early detection mechanisms for valuation errors and compensation to investors.

The ESMA Final Report includes a section focusing on private equity and real estate potential valuation issues.

Following the publication of this report, the CSSF is likely to publish its own feedback report on the CSA on valuation and to specify the supervisory actions it intends to initiate based on ESMA's conclusions. However, in the meantime, UCITS management companies and alternative investment fund managers ("AIFMs") could already start looking at their own valuation policies and procedures in light of ESMA's key findings and identify any action which may need to be taken in order to align them with ESMA's expectations.