WEEKLY E-MAIL

30 March 2023

UNLISTED VS LISTED ASSETS – VALUATION WATCH

By Sam Eley

The Australian Prudential Regulatory Authority (APRA) has been increasingly concerned about the valuations being applied by large superannuation funds on their unlisted assets.

John Lonsdale, the new head of APRA, has noted that the regulator wants to improve the frequency and methodology applied when valuing the $650 billion of unlisted assets owned by large superannuation funds. APRA’s General Manager of Superannuation, Katrina Ellis, also commented that “super funds should revisit the value of their holdings more often than they do now” and that “Trustees should be more proactive, given the state of markets, and really be considering what you should be doing to make sure your valuations are not stale.” These unlisted assets predominantly comprise Infrastructure, Commercial Property and Private Equity investments.

One of the major reasons behind APRA’s concerns are the differing performance figures for listed and unlisted property assets during the calendar year 2022. Unlisted Property funds posted gains of almost 19% for the nine months to the end of September 2022, compared to Listed Property, slipping by nearly 20% for the same period. This is a significant differential considering the underlying assets are affected by the same thing – rising interest rates and high inflation.

To get on the front foot, UniSuper recently announced they are doubling the frequency of their unlisted asset revaluations from half-yearly to quarterly. Many other large superannuation funds have been resolute in their valuation protocols and have declined to consider out-of-cycle valuation updates.

Large Superannuation Funds have increasingly been turning to the unlisted market in an attempt to smooth returns and reduce volatility, given the valuation cycle is often quarterly, half yearly or annually. This is in comparison to the listed market, which values assets daily. For example, Australia’s largest superannuation fund, Australian Super, now holds 15.2% in Unlisted Infrastructure, 5.3% in Unlisted Property and 5.0% in Private Equity investments, representing approx. 25.5% of the overall asset allocation in unlisted assets that are not valued daily.

Given larger superannuation funds trade on a specific daily unit price, the valuation of these assets is fundamental to the underlying unit price being applied for members balances. It therefore is very important to investors making contributions or rolling money in or out of a particular fund. If valuations of unlisted assets are artificially high, this could disadvantage members making contributions as they buy units at an inflated valuation compared to those members who perhaps rolled money out when the unlisted asset valuation was at a premium.

The Australian Securities and Investment Commission (ASIC) noted the performance disparity of unlisted assets when markets fell on the onset of COVID-19 in March 2020. ASIC examined the conduct of 23 trustees across retail and industry funds who switched investment options before the revaluation of the unlisted assets– a clear breach of managing conflicts of interest and the trustees/directors’ duty to act in the best interests of members.

As Governments have put additional pressure on the Trustees of public superannuation funds to meet performance benchmarking criteria, it’s no surprise that unlisted assets have become favoured by most large superannuation fund providers. However, the divide between the performance of listed and unlisted markets raises questions on how accurate the valuation methodology is for these unlisted assets. It will be interesting to see whether investors have been too pessimistic about listed assets at present or if the next cycle of revaluations will be considerably lower for unlisted assets.

Sam Eley
Senior Financial Planner
Authorised Representative No. 1234685

If you have any questions or comments, please email me at sam@gfmwealth.com.au

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