The UK’s top financial regulator is preparing to launch a sweeping review of valuations in private markets, according to people familiar with its plans, amid growing fears over the impact of higher borrowing costs on the sector.

The Financial Conduct Authority’s exercise, which follows a major review of asset managers’ liquidity in the aftermath of last year’s UK bond market turmoil, will look at the “disciplines and governance” over valuations, one of the people said.

That includes looking at who within a firm is accountable for valuations, how information about those valuations is passed upwards to the relevant management committee and board, and what other governance procedures are in place, the person said.

The exercise, to be kicked off by the FCA by the end of the year, comes as global regulators grow increasingly uneasy about the potential for blow-ups in private assets and other markets following the abrupt reversal of more than a decade of low interest rates.

Global securities watchdog Iosco recently warned that the $13tn global private capital sector was too complacent about the possible risks, highlighting valuations as one of a number of areas where vulnerabilities could emerge.

Private assets such as real estate and unlisted shares and bonds are often valued using models that are typically slower to respond to deteriorating market conditions than listed assets.

Assets are usually valued on a quarterly basis, meaning a sharp market correction may not feed through to the valuations for weeks, if not months.

Fund managers who invest in private markets typically have greater discretion over the valuation of their own assets because their holdings are not subject to the daily swings of public market sentiment.

If the FCA does not feel that the governance processes are robust, it can call out failures. If a firm does not respond to that then it can be ordered to make improvements, since valuations are “part of the risk environment” for regulated firms, the person added.

The second person said the review had not yet been fully scoped out and would not begin until later this year. The number and type of asset management firms involved has not yet been finalised, the person said.

The FCA declined to comment.

There are about 2,600 firms in the UK’s £11tn asset management industry, with the FCA acting as their primary regulator. They include hedge funds, venture capital and private equity, as well as large institutional asset managers.

In July, the FCA sharply criticised asset managers’ liquidity management, warning that some firms’ plans to deal with large-scale redemptions “lacked coherence”, and ordered them to make improvements.

US regulators have responded to fears about private markets by ordering private funds to make more extensive disclosures about their performance and expenses, an initiative that has prompted a lawsuit from a coalition of private equity, venture capital and hedge funds.

Additional reporting by Will Louch

There is no problem that private equity will not attempt to solve, including the problem of private equity itself. Interest rates have jumped and buyout exits have slowed amid a drought in M&A and new stock listings. The cash-churning machine is slowing. But here comes a new market.

This week, Goldman Sachs announced that it had raised $15bn for a private equity fund. The fund will not be used to buy companies. Rather, it will buy limited partner interests in other funds, a transaction known as a “secondary”.

In such deals, pensions and other institutional investors can get cashed out, often at a discount to net asset value, near the end of a particular fund’s life. The fund sponsor is not then forced to sell an underlying portfolio of companies before it believes it can get full value.

Private equity secondaries have grown from a niche strategy with $100bn of assets to one approaching $500bn. This coincides with the rise of other forms of financial engineering, including “net asset value” lending, using an underlying fund holding a series of companies. Recently, Vista Equity relied on a NAV loan to stump up the $1bn of equity it needed for a challenged software investment.

Private equity firms are also increasingly selling equity stakes in fund managers to other specialised PE firms in order to give cash to partners.

Some industry veterans claim the golden era of private equity has passed now that low interest rates are unavailable and corporate valuations are more volatile. But the dollars keep flowing into these alternative assets. McKinsey estimates that there is now $12tn of private capital AUM. The total has grown at a 20 per cent compound rate over the past five years.

This complicates true price discovery. Public markets, while not flawless, tend to be a stricter test of fair valuations. The private equity industry deserves credit for finding continuous ways to bypass the issue and keep their fee stream running.