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Don’t follow the lead of overseas on unlisted assets: Frontier

Australian super funds and asset managers shouldn't ape their international peers when it comes to unlisted investment practice, according to Frontier, and demand for more frequent valuations will ultimately be worn by members.

With super funds allocating more and more of their FUM to unlisted investments, and APRA increasing its focus on the space – particularly valuation practices – Frontier says that Australian super funds’ approach to unlisted assets shouldn’t necessarily mirror that of overseas investors.

“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 Paul Newfield (pictured), director of research at Frontier Advisors.

“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 believes that valuation frequency and methodologies in Australia are different to global practice “for good reason”, with redemption periods impacted by variables like the longer investment horizons of superannuation funds. Some overseas markets have shorter redemption windows, but Frontier believes Australia’s stronger economic response to Covid-19 and the domestic impacts of rising interest rates means the local approach “shouldn’t necessarily mirror the practices seen in overseas markets”.

“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,” Newfield said.

“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.”

Frontier has observed some funds moving to a temporary basis of more frequent valuations – a good move given recent economic uncertainty – but warns that embedding a continuous increase in valuation frequency in perpetuity comes at a cost that needs to be weighed carefully and which is “ultimately worn by members”.

“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.”

Lachlan Maddock

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

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