Leading industry funds and asset consultants have called on the broader industry to get on board with developing accurate, independent and well-governed valuation processes, suggesting that bad practices are not doing anyone a favour and send a wrong message from the sector.
The area has been on the front of mind for APRA, with the regulator releasing Prudential Practice Guide (SPG 530) earlier this year to address broader governance concerns around the use of unlisted assets and set its expectations of best valuation practices.
Paul Newfield, Frontier Advisors’ director of sector research, told Investment Magazine’s Fiduciary Investors Symposium that the valuation issue is “systemic” and will still be subjected to close scrutiny in the next couple of years.
“For any fund that doesn’t have valuations as a top priority – it ought to be,” he told the conference in Healesville, Victoria. “It’s not a priority because anything’s bad or anything’s broken, it’s a priority because it’s a key point of focus, which is not going to be going away.”
“If you see an article in the paper [about bad practices], you might well think: ‘Well, it doesn’t affect me, it was someone else’.
“I think it affects everyone because that undermines the confidence of the public and increases the pressure on the regulators and the politicians to look at funds and say: ‘What are you doing to address the issues at hand?’”
The unlisted spectrum
AustralianSuper’s principal of valuations Helen Lagis said there’s no doubt that more regular valuations, as being pushed for by regulators, is not a bad development, but added it shouldn’t be frequency just “for the sake of it”.
Lagis’ team in the $300 billion fund sets the valuation for the directly held unlisted assets (property, infrastructure, global real estate debt and private equity) that occupy 13 per cent of the total AUM, as well as building a good valuation framework for pooled external funds.
“If you’re looking… to value venture capital investment more frequently, or to value contracted loan more frequently – what are you trying to achieve there?” she said.
“But then to be able to value investments more frequently because of an asset trigger, or a market trigger of sorts – that makes sense.
She pointed out that the spectrum of unlisted assets, from private equity to infrastructure, has different degrees of complexity when it comes to valuation. Hence when APRA issues communications that try to “appease processes across a very broad chain”, it becomes difficult.
“I think where the regulator struggles is that some of the wishful thinking and the wishful statements out there are just a little bit removed from practically how one does that.”
A question of cost
It is a sentiment echoed by Cbus’ Brett Chatfield, who took over the CIO baton from Kristian Fok earlier this year. The $85 billion construction industry fund has a combined 27 per cent of pooled and directly held unlisted assets in its portfolio.
The valuation frequency ranges from daily, weekly and monthly pricing to at least quarterly for the majority of the assets, except for “de minimis” investments where the valuation cost can be significant relevant to their sizes, according to Chatfield.
He said if funds go beyond the quarterly valuation guidance, they will need to examine the cost benefit of that action. “But you still have to have that process for out of cycle adjustments, if you like, where there is an event,” he said.
“Because we saw through COVID that certainly there was a range of funds, which tended to be on the smaller end, that made no adjustments through that period, and members were switching options and moving in and out of the fund. We think it can lead to significant inequity amongst your membership as well.”
Newfield added that more frequent valuation would not only lead to members bearing the cost but also doesn’t make sense against the fact that risk is not calendar time-centric.
“The property doesn’t know that it’s 31 of March or 30 of June, it doesn’t matter to them,” he said.
Independence remains the key
In terms of where the valuation team actually fits within the fund, both Lagis and Chatfield stressed it’s important for them to have an independent position. Although the philosophy is manifested slightly differently between the two funds.
Cbus’ valuation committee is made up of specialists from operational risk and second-line risk teams, managed by the COO (chief operating officer) who then reports to the CEO. The fund intends to add more resources to the area internally, and directly held assets are evaluated by external valuers that rotate every three years.
AustralianSuper, meanwhile, works with an internal valuation team. The fund’s board is ultimately responsible for the valuation policy and “set the tone”, Lagis said. The line of report then extends to CEO, COO, CFO, the valuation committee (whose members are outside the investment team) and the valuation team, many of whom were recruited from the big four accounting firms.
While the fund still works with external valuers, Lagis said having internal talents has significant time and cost benefits, such during the initial period of Covid where there was a high demand in the market for re-evaluation, and is why it’s essential to have the right people on the team.
“That’s important because we’re able to challenge other people’s views on values when we have to,” she said.
“We’re able to make recommendations on valuations beyond copying somebody else’s work and putting that forward, we have conviction in the valuation that we put forward entirely.”