Israel's Capital Markets Authority Seeks Tighter Oversight of $80 Billion in Alternative Investments

Israel's Capital Markets Authority is planning to enhance supervision of alternative investments held by institutional bodies managing public pension and provident funds. These non-tradable assets, including private equity, real estate, and private debt, currently total over 300 billion shekels (approximately $80 billion USD). The existing regulation mandates annual valuations, but significant value fluctuations can occur between these assessments, creating a lack of transparency for both regulators and savers.

This valuation gap can lead to unfair transfers of value between fund members. For instance, a departing member might receive an outdated, higher valuation for assets that have since declined, benefiting them at the expense of remaining members. Conversely, new members could acquire assets at an artificially low price following an unacknowledged market rise. "Stable value in alternative assets due to old information does not necessarily indicate low risk," noted a market source.

To address this, Asaf Nachmani, Senior Deputy to the Capital Markets Commissioner, stated that the Authority intends to adapt its regulations to the growing scale and complexity of these investments. He highlighted that valuations for private equity funds can be delayed by up to three months, and during periods of high market volatility, the delayed recognition of losses can be substantial, especially when funds are forced to liquidate assets prematurely to meet liquidity needs.

The Authority aims to increase the frequency of valuation assessments to at least quarterly. While many firms already conduct more frequent valuations, Nachmani emphasized the need for consistent, updated assessments across all institutions. The primary driver for less frequent valuations among institutional bodies has been cost savings, but the significant increase in public funds allocated to alternative assets necessitates a regulatory update.

Nachmani described the current regulatory framework for investment funds as a "supervisory blind spot," stating that even with monthly or quarterly reports, a deep understanding of these investments is not always possible. He indicated that future regulatory requirements will likely include scrutinizing funds that cannot provide at least quarterly valuations. The Authority also seeks greater transparency regarding the specific assets held within these alternative funds, as annual valuations may suffice for real estate but not for private equity.

Lawyer Arnon Segev pointed to the rapid growth of "Continuation Vehicles," which allow existing investments to be rolled over into new funds when the original fund's term ends. This practice, common when immediate liquidation is undesirable, raises significant questions about pricing, valuation, conflicts of interest, information asymmetry, and fund manager incentives. Segev advised investors to consider these rollover possibilities from the outset of an investment.