These days there is no real question that the SEC has increased its focus on regulating private funds. Proposed rule changes, exam priorities, and enforcement activity likely have fund advisers on high alert, and rightfully so. As the recent ACA Global Private Markets Quarterly Update for Q3 2022 highlighted, the scope of the SEC's enhanced regulatory agenda in the private funds space continues to expand and the Commission has the spotlight shining bright on the valuation of Level 3 assets.

This changing regulatory environment, the likelihood of a 2023 recession, and the attendant pressure on private funds to perform relative to the market, make valuation policies and procedures more important than ever. Supply chain and logistics issues coupled with other inflationary pressures certainly influence valuations, and advisers and compliance officers need to take care that they sufficiently build those considerations into their compliance programs with extra attention given to ensuring valuations reflect current volatility. But keeping investors satisfied too often results in looser adherence to valuation processes in times of uncertainty.

How much scrutiny are advisers giving to the financial reporting of their portfolio companies? If results look too good to be true these days, they probably are. What's the right balance for shifting comparables during the life of a fund, and have you documented the motivations for that shift appropriately? And as investors become more thoughtful and demanding of their private fund advisers, how can funds use valuation transparency to differentiate themselves while making sure they avoid disclosing information subject to later revision given the uncertainty of market forces? These are all questions that should be top-of-mind as we move into 2023.

Level 3 assets have always been subject to more discretion from the adviser in the context of valuation policies than other assets. But with enhanced SEC exam and enforcement efforts in the private fund area and increased demand for above average performance in a likely economic downturn, it's worth prioritizing honest conversations with fund personnel about how our economic realities necessarily impact valuation efforts.