Frontier Advisors is working with Australian asset owners to hold fund managers to account when it comes to appropriate valuation of unlisted assets.
At a time when funds under management in the superannuation sector are growing strongly, and with that growth mandated to continue, funds are also allocating a larger portion of these growing portfolios toward unlisted assets. Unsurprisingly, as a result, APRA are increasing their focus on this space, and in particular appropriate valuation practices.
We recently commented on global practices among fund managers and how those practices are quite different to those in place for Australian fund managers in certain dimensions, such as valuation frequency and redemption windows, particularly in the property asset class.
“Frontier has advised on investment in unlisted assets for almost three decades. There has been huge evolution in the industry over this time, but no more so than in recent years, particularly in the post-COVID period,” said our Director of Research, Paul Newfield.
“A confluence of factors, none the least of which are new regulations, have seen a heavier focus by asset owners on valuation governance practices and greater interrogation of the valuation policies of underlying fund managers, which are also areas of increased focus for Frontier.”
We believe valuation frequency and methodologies in Australia may be different, for good reasons, when it comes to global practice. Critical areas, like redemption periods, are impacted by a range of variables that require a unique perspective for Australian investors with typically longer portfolio horizons.
Coupled with Australia’s stronger response to the COVID ‘black swan’ event, and the domestic impacts of rising global interest rates, we note the Australian approach shouldn’t necessarily mirror the practices seen in overseas markets, which can have shorter redemption windows.
“But responses to specific market trends, such as rising interest rates or cap rates, all need to be balanced in any program of measurement and management to ensure valuations are reasonable and appropriate,” said Paul.
“Australian fund managers typically use a ’transaction-led valuation process’, particularly in property. While this is a useful measure to gauge valuations, in a quieter market this creates challenges, from which learnings from overseas may be helpful.”
We generally view valuation practices by unlisted fund managers to be thorough and well governed and have seen some Australian fund managers take positive steps in recent times moving to a temporary basis of more frequent valuations, a move described as a welcomed practice given the inherent economic uncertainty in the near term and meaningful changes in interest rates and inflation levels.
However, we caution that embedding a continuous increase in valuation frequency in perpetuity, comes at a cost that needs to be weighed up carefully, as it is ultimately worn by members.
According to Paul, “unlisted investments create unique valuation challenges for many Australian investors and need to be managed when accessing the often attractive investment characteristics of these asset classes. To manage these challenges responsibly and thoroughly, and to mitigate the risks inherent in unlisted investment valuations, valuation governance frameworks must be carefully structured and regularly reviewed. This ensures they are fit for purpose in a constantly changing economic and regulatory environment.”
On the issue of redemption periods, we note having longer periods of committed capital for superannuation fund members saving over multiple decades, and giving certainty to ownership, is important in an aggregate sense.
“We don’t have an issue with longer lock-in periods that are fit for long-term capital and prevent a liquidity mismatch with underlying assets,” said Paul.