Australia has some of the most lax practices in the world for the valuation of unlisted assets, raising questions about whether superannuation fund members are investing in a fair environment.
Infrequent valuations, poor methodologies and extremely long redemption windows in Australia run counter to the strict standards increasingly employed in the United States, the United Kingdom and Europe, according to Shrabastee Mallik, a senior consultant at independent asset and investment consultancy Frontier Advisors.
In a panel discussion with asset owners about the governance and valuation of unlisted assets at Conexus Financial’s Fiduciary Investors Symposium held in Sydney’s Blue Mountains region, Mallik said Australian fund managers typically use a “transaction-led valuation process” which allows a small number of fund managers to control the market.
The use of historical information to value assets also runs against global best practice, she said, pointing to the office market where the same historical absorption numbers are being used despite enormous changes to the market when compared with pre-pandemic levels.
And redemption practices in Australia are “probably the worst standard globally”, with some fund managers getting away with five or even seven-year windows, whereas funds in the United States, the UK and Europe have quarterly windows, Mallick said.
“You can get away with annual valuations…in a pretty stable market…but when you have more market movement, and you have interest rates increasing at the rate that they’re increasing at the moment, you know, quarterly valuations are what should be done,” Mallik said.
Questionable valuations lead to doubts about whether unit holders are getting an equitable price and operating in a fair market, she said.
“In an environment where you haven’t had many transactions, you need to rely on other valuation methodologies,” she said, pointing to a consensus-led evaluation process in the US and the UK where a group of valuers, auditors and agents gather to determine value based on a range of factors.
In the UK and Europe, better practices have meant asset values have corrected by 15 per cent to 20 per cent, even in strong sectors such as industrial property, she said. “You have seen those corrections in the market because they have approached it from [the perspective of]: ‘Well, even if we have no transaction evidence, we know the fundamentals have changed.’”
However, in a statement supplied to Investment Magazine after the event, a spokesperson for Frontier clarified the consultancy’s position that valuation standards in Australia “as a whole are good, but there are always opportunities for enhancements”.*
The spokesperson added that the majority of managers assessed by Frontier have sound valuation practices, noting that some have moved to quarterly valuations temporarily to reflect rising interest rates and inflation or respond to market volatility.
“Frontier as an organisation supports unlisted assets, including longer redemption periods which are fit for long-term capital and which prevent a run on managers, as occurred in certain asset classes during the GFC,” the spokesperson added.
In a survey undertaken during the panel session, only 8 per cent of participants had no investment in unlisted assets, and 45 per cent – the largest number of respondents – had between 21 per cent and 30 per cent of their assets in unlisted categories. A second survey found 70 per cent of respondents expected this to remain the same in the next 12 months.
Tensions around valuation and liquidity of unlisted assets have existed as long as the asset class, said Seamus Collins, CIO at Mine Super, but the rising scale of allocations to unlisted assets–and the success of the asset class–has exacerbated the issue.
With commentary in Australian media that the Australian Prudential Regulation Authority (APRA) wants to raise the governance standards for unlisted assets, Collins pointed to difficulties for asset owners that do not directly own assets but rather invest in pooled funds and rely on intermediaries, causing limitations on their ability to direct change.
Regulatory changes may soon make trustees accountable for appropriate valuations, Collins said, “and that means we need to reach through the responsible entity to understand their valuation methodologies, their procedures, their frequency, and we need to be satisfied with that.”
Discussions have further to go
But discussions around how to govern pooled investment vehicles have further to go, he said.
Mallik said the increasing prevalence of co-investments and joint ventures is increasing the ability of asset owners to influence fund manager partners. Fund managers are also improving their governance frameworks with independent advisory boards and valuation committees.
But there is still sometimes resistance at the board level, she said.
“They will have that sort of footnote at the bottom saying: ‘If you think markets have moved plus-or-minus 5% then you need to conduct an out-of-cycle revaluation.’ But that’s in the hands of the fund managers themselves. So they’re the ones that are sitting there saying: ‘Well, it hasn’t moved 5% or, you know, we don’t think that fundamentals have changed.’”
Ross Barry, CIO at Spirit Super, said it is critical for funds to get unlisted valuations right so that incoming members are not overcharged. But the concept of “true value” of an asset is challenging, as it is a function of future earnings when the future is uncertain.
“There is this challenge around trying to get as close as you can–making your best estimate to what the true value of something is worth with all the tools that are available to you–in a way that satisfies the regulator that you’ve applied sufficient rigour and insight into doing that.”
*This article was updated on 5 July 2023 to include additional statements supplied by Frontier Advisors as an addendum to Mallik’s comments, and edited to clarify comments around valuation practices.