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APRA plots unlisted asset ‘deep dive’ review

The prudential regulator will undertake another review of how superannuation funds treat their unlisted assets, with a special focus on “valuation and liquidity management practices” as they come to account for larger and larger chunks of the portfolio.

APRA will conduct a “deep dive review” of a number of large and mid-size funds with material exposure to unlisted assets, the regulator announced in its interim policy and supervision priorities update on Wednesday.

“System-wide risks associated with investment market conditions highlight the importance of robust investment governance by registrable superannuation entity (RSE) licensees,” the regulator wrote. “APRA expects superannuation licensees to ensure investment governance practices are sound, particularly in relation to asset valuation and liquidity management practices,” the regulator wrote.

The review, first reported by Reuters in January, is expected to focus on liquidity risks that come with chunky allocations to unlisted assets, as well as valuation governance across asset classes including commercial property, private equity and private credit.

  • APRA has conducted reviews of unlisted asset valuation governance in the past, including a “thematic” review that ran from September 2020 to March 2021 to explore how funds valued assets during a period of significant market volatility. That review found that most funds took a proactive approach to revaluing their assets but that revaluation frameworks were “typically inadequate”, with no predefined triggers for a revaluation and no processes for monitoring or adjusting them. APRA also took aim at limited board engagement on the process, and what it described as an “over-reliance” on external fund managers and asset consultants.

    “Many RSE licensees routinely accepted valuations from their fund managers without any challenge on the appropriateness of these valuations,” the regulator wrote at the time. “This was more apparent when reverting to normal valuation cycles, when many RSE licensees defaulted back to using manager valuations between June and September 2020 without conducting any assessment of their appropriateness.

    “RSE licensees requiring a framework for review or adjustment at the time of the initial out-of-cycle valuation approval, with quantitative frameworks for reverting to normal valuation cycles in a consistent manner, is consistent with APRA’s expectation for prudent practice.”

    Funds were told in mid-2023 to value their unlisted assets at least quarterly and be able to justify to the regulator if they don’t, as well as build revaluation triggers based on market volatility and changes in the “external operating environment” – including government policy settings – into their framework.

    “The reforms have been broadly welcomed by trustees, many of whom have sharpened their focus on the valuation of unlisted assets, liquidity management and stress testing in recent months,” APRA deputy chair Margaret Cole said at the time. “We note that in some cases trustees have already aligned their investment governance to the draft guidance released for consultation in November 2022.”

    In a late 2023 case study of the different approaches funds took to their holdings in Canva, APRA assessed the majority of the funds’ valuation practices as “appropriate”, with funds making adjustments based on their specific circumstances and querying the valuation practices of their investment managers and. But there were still inadequate valuation practices and deficiencies in information provided to the board.

    Lachlan Maddock

    Lachlan is editor of Investor Strategy News and has extensive experience covering institutional investment.

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