Unlisted investments create valuation challenges

Australian asset owners should hold fund managers to account when it comes to appropriate valuation of unlisted assets, according to Frontier Advisors.

At times when funds seek to allocate a larger portion of growing portfolios toward unlisted assets, it is crucial, Frontier said, to carefully manage the challenges that come with valuation of unlisted investments and it will require the regular review of the valuation governance frameworks.

“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,” Frontier Advisor’s Director of Research, Paul Newfield, said.

Frontier’s general view on the valuation practices by unlisted fund managers is that they are 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.

However, the firm has 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.

According to the company, valuation frequency and methodologies in Australia may be different “for good reasons” when it comes to global practice, with critical areas, like redemption periods, being impacted by a range of variables that required a unique perspective for Australian investors with typically longer portfolio horizons.

On top of that, Australia had a stronger response to the COVID ‘black swan’ event, and the domestic impacts of rising global interest rates, and the Australian approach shouldn’t necessarily mirror the practices seen in overseas markets, which can have shorter redemption windows.

“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,” Newfield said.

“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, Frontier said that having longer periods of committed capital for superannuation fund members saving over multiple decades, and giving certainty to ownership, was important in an aggregate sense.