Asset owners are growing cautious of private market valuations, fearing falling equity markets are a harbinger for valuation pressure in unlisted markets.
Jessica Melville, head of mid risk portfolio strategy and research at AustralianSuper, noted equity markets have fallen considerably and AustralianSuper’s mid risk portfolio has seen this in its listed infrastructure and REIT investments, leading to the question of what will happen in unlisted markets.
“There’s a reason to be cautious and there probably is overall downward pressure,” Melville said, noting the fund is being “very mindful of maintaining that valuation discipline.”
However she noted transaction activity is still strong and “you can’t help but acknowledge that there is this weight of capital that is still chasing private assets globally.”
Speaking in a panel discussion at Conexus Financial’s Fiduciary Investors Symposium held in June at the Blue Mountains, Melville said AustralianSuper has recently reduced risk in its mid-risk portfolio–which is primarily focused on real assets – by reducing its exposure to liquid and listed investments.
Detailed valuations
The private equity team at IFM Investors undertakes detailed valuations quarterly according to Jeremy Larkin, executive director of private equity at IFM. With rivers of capital flowing into venture capital in recent years, Larkin found at the beginning of this year there was a “disconnect” between his team and some of the founders he was dealing with.
“And that was because, I would say, they were on the drip of venture capital funding where they’d only raised, say, three or five million dollars, but they’d raise it at increasingly high levels and the prospect of a down round was a complete anathema to them,” Larkin said.
“Ultimately, all markets are interconnected. At the moment, I think that venture capital is the disconnect in the rest of the system because it’s been valued on the latest mark, rather than referenced to any underlying fundamentals.”
There has been an “awakening” and the rules of raising cash are “about to be re-written…so I think that’s where the fracture will occur in the overall system”, Larkin said.
With a roughly 17 per cent allocation to private equity at its last portfolio update in March, and inflation expected to build, Australia’s Future Fund is looking closely at private markets and “those investments that respond well in a high inflation environment”, said Kelvin Mak, director of private equity at the Future Fund.
The buyout end of private equity is an important part of the fund’s portfolio, Mak said, as “large businesses do have more market power, and push through more price increases in a high inflation environment.”
While the fund does look at venture capital opportunities and views them as “a great access point for looking at innovation and harnessing technology,” it is also “cautious about valuations across the spectrum.”
With “a lot of pressure” on growth and venture funds, “managers are starting to reconsider their valuation policies,” Mak said. “We know that some of them are applying discounts for illiquidity or out of conservatism.”
But the impact of this might take at least half a year to “wash through the system,” he said. “A lot of our venture or growth businesses still have a bit of cash runway left, so I’m not sure if you’re going to see the immediate effect in the next quarter or two.”
Unlisted assets
Crestone Wealth Management – a high net worth and ultra-high net worth family office and charity wealth manager with around $25 billion in assets under management – does not do valuations as it invests in funds, said Scott Haslem, Crestone’s chief investment officer.
But Haslem agreed there was “clearly downward pressure” and the fund was thinking increasingly about the role unlisted assets are playing in the portfolio.
With interest rates low for such a long period of time, this had been problematic for designing clients’ portfolios, with a significant drift of fixed income allocation into real assets, Haslem said.
“So the interesting thing now is people have rotated some of their fixed income allocations into real assets where you’re getting a similar risk and return profile without liquidity,” Haslem said. “But most of our clients don’t really care that much about liquidity.”
