As open-ended European long-term investment funds make private assets more accessible to retail investors, the tension between illiquid holdings and investor demands for liquidity is intensifying. In a conversation on 3 August 2026, Laurent Capolaghi, an EY Luxembourg managed services and private equity leader with more than two decades of sector experience, discusses the auditor’s role in scrutinising valuations—and the limits of that role. 

In this conversation, the term “open-ended fund” refers to an alternative fund that invests predominantly in illiquid private-market assets while offering periodic redemption windows, subject to notice periods and gates

Sylvain Barrette: How has the role of the auditor evolved in the private asset space?

Laurent Capolaghi: I have had the chance to navigate several crises, from the 2000 dot-com bubble to the 2007 financial crisis and the 2011 sovereign debt crisis. I have overseen the private equity sector for our office.

My work involves EY’s fund solutions, which cover four key areas: finance, including the financial information delivered by funds and their special-purpose vehicles to investors; taxation; valuation services; and governance. We often find ourselves at the intersection of valuation risk and liquidity risk.

There is much talk about open-ended funds experiencing challenging times. Why are these products so complex for auditors and asset managers?

L.C.: The phenomenon of open-ended funds is very recent in Europe. It is inherently complex because these funds attempt to provide liquidity—subscriptions and redemptions—for assets that are, by definition, illiquid.

This creates a fundamental incompatibility: it is difficult for a fund to generate returns while simultaneously keeping enough cash on its balance sheet to meet redemptions. Unlike Ucits funds investing in liquid, transferable securities, open-ended private-asset funds generally offer redemptions only monthly or quarterly and may impose gates when requests exceed specified limits.

Europe does not have a direct equivalent of the US business development company regime. I find listed vehicles holding private assets compelling because they can provide secondary-market liquidity without forcing the fund itself to redeem shares—although those shares may trade at a premium or discount to net asset value (NAV).

Auditors are often described as the “policemen” of fund valuations. Is this an accurate description of your responsibility?

L.C.: That description risks overestimating our role and could give investors a false sense of security. Under AIFMD, valuations must be performed either by an external valuer or by the AIFM itself, provided that the internal valuation function is functionally independent from portfolio management and appropriately insulated from conflicts of interest.

The external auditor provides an additional independent layer of scrutiny, following the valuation function’s operational controls and the organisation’s internal oversight. Ultimately, the fund’s governing body is responsible for the annual accounts, including the valuations reflected in them.

The auditor is the ultimate gatekeeper of the annual accounts, not merely the portfolio valuation. Of note, audits are mandatory for investment funds managed by an authorised AIFM, but not necessarily for AIFs managed by a registered AIFM. The auditor therefore cannot be held solely responsible.

An authorised AIFM is fully licensed and supervised by the CSSF with an EU marketing passport. A registered AIFM operates below asset thresholds under a lighter regime without a passport.

If the primary responsibility lies with the AIFM, what exactly does the external auditor do?

L.C.: We define a level of “materiality” before starting our work. We then plan verification procedures, which can involve inspecting internal controls throughout the year to ensure the AIFM’s processes mitigate the risk of erroneous valuations. However, valuation and control tests cannot substitute for “substantive tests,” which are our annual checks. This is particularly challenging for venture debt or distressed debt, where obtaining sufficient evidence is difficult.

In distressed debt, recoverability depends on the underlying assets. For real estate, this may involve foreclosure and fire-sale scenarios. A fire-sale value differs from fair value, which assumes an orderly, arm’s-length transaction between well-informed parties under normal market conditions.

Does your oversight only happen once a year, or can you intervene if a valuation issue arises mid-year?

L.C.: Legally, the auditor provides an opinion on the annual accounts once a year. However, we are available to the board and management at any time. In some jurisdictions like France, auditors perform a limited review every six months, but in Luxembourg and most of the EU, this is not legally required. If separately engaged by the board or another authorised party, the auditor may perform agreed-upon procedures or another form of assurance work on an interim NAV.

Auditors must remain informed about developments affecting the assets despite the challenges related to the limited market data. During the autumn review of control testing on private debt, for instance, the auditor checks that covenant monitoring is up to date and that the SMEs’ financial reporting reliably supports those covenant assessments.

The auditor considers covenant compliance, the borrower’s liquidity and other indicators of credit quality. The valuation may then be tested using a discount rate consistent with the market yield on instruments carrying comparable credit risk.

If a significant event arises during the year, such as a portfolio-company default, the fund may need to reassess the asset’s valuation and inform the relevant stakeholders. The auditor may also perform agreed-upon procedures or other assurance work on an interim NAV if formally engaged by the fund’s governing body or another authorised party.

Some funds commission semiannual or quarterly limited reviews. These are less extensive than a full audit but can provide additional interim assurance.

What happens if you disagree with the valuation provided by the fund manager?

L.C.: There are essentially four types of audit outcomes. First, if the disagreement involves an amount below our materiality threshold (which might be lower for retail investors than professionals), we inform the board in writing but do not modify our opinion.

Second, if there is a clear, isolated error—like an investment that should be valued at zero but is marked at 100%—we issue a “qualified opinion.” This tells investors the accounts are fair “except for” that specific investment.

Third, if errors are diffuse and impact the NAV across the board, we issue an “adverse opinion,” stating the accounts do not provide a true and fair view.

Finally, if we cannot obtain sufficient appropriate evidence—which can be particularly challenging for certain alternative assets—we issue a disclaimer of opinion, stating that we are unable to form an audit opinion.

How do you determine whether the AIFM has genuinely challenged the assumptions rather than simply documented its approval? What evidence would cause you concern?

L.C.: The auditor reviews the information provided and independently reassesses either a representative basket of assets or individual assets where they differ significantly. As valuing illiquid assets is not an exact science, the auditor will typically determine a reasonable price range and compare it with the valuation team’s proposed range or price.

How do auditors identify stale or unrealistic assumptions? How does the approach change when an asset becomes distressed

L.C.: To identify valuation assumptions that may be technically defensible but economically unrealistic, auditors have moved away from highly sensitive and subjective discounted cash flow (DCF) models toward more observable market evidence, such as comparable transactions and listed company multiples.

For private debt, they verify that the “market yield” used for discounting future cash flows reflects the current rate demanded by the market for similar risk profiles; if market liquidity dries up and yields rise to 10% or 12%, the fund would generally reduce the instrument’s fair value, potentially requiring an unrealised loss to be recognised.

When an asset becomes distressed, the methodology may shift towards a waterfall or liquidation analysis to estimate the recovery available after satisfying senior claims, including heavily collateralised bank debt.

Serious concern arises when there is a lack of documentation, such as outdated covenant certificates or missing management accounts, which prevents the "back-testing" required to ensure internal valuations align with the borrower's actual financial health.

What is the role of the CSSF in that process? Is it playing a useful role?

L.C.: The CSSF regulates investment fund managers and oversees approved statutory auditors. Its oversight of auditors is generally conducted retrospectively through inspections of selected audit files, while its supervision of fund products and management companies is more direct. The CSSF must be notified of relevant NAV calculation errors, at which point it can provide guidance, request meetings, or seek further information from the fund.

The regulator focuses its interventions there rather than on the auditor, who acts as a reviewer. If necessary, the CSSF can take preventive measures, issue sanctions, or make public announcements regarding valuation failures.

Furthermore, the CSSF has helped create a mature regulatory environment in Luxembourg by issuing circulars that clarify specific expectations for the valuation function. It also regularly monitors independent valuation teams within managers to ensure they maintain the required separation from portfolio and risk management.

Beyond the numbers, you mentioned “gating” and legal risks. How do these elements factor into the audit?

L.C.: The auditor has a significant role in ensuring that legal rules in the fund's Limited Partnership Agreement are applied equitably. For instance, if a “gating” mechanism limits redemptions to 5% of the NAV, we verify that the gate was applied in accordance with the fund documents, including any pro-rata allocation or priority rules, and that no investor received improper preferential treatment. If the gating mechanism is not applied fairly, it can be even more damaging than a numerical error in the NAV.

Are there specific conflicts of interest you watch out for regarding how managers are paid?

L.C.: I personally do not accept mandates where management fees are based on the NAV of unrealised assets because, in my view, this creates an incentive to inflate valuations. In a serious private equity fund, fees should be calculated on the “commitment” during the investment period—which is logical, as that is when the research work happens—and then on “invested capital” thereafter.

Some say only 3% of cases involve an external independent valuer. Would more external valuation help your work?

L.C.: I cannot confirm the 3% figure. Having an additional independent valuer is very favourable and facilitates the auditor's work, as there are specific auditing standards for using the work of a third party. However, the AIFM Directive is clear: the AIFM cannot delegate its ultimate responsibility for valuation to a third-party.

Even if they hire an external firm, the AIFM remains responsible. Additional third-party reviews and quarterly auditor assessments can strengthen oversight, but this comes at a cost for the investor. That may explain why there are so few independent valuers.