Australian super funds step up scrutiny of unlisted assets

Following the establishment of new guidelines from the Australian Prudential Regulation Authority (APRA), Australian superannuation funds are shifting to more frequent valuations of the A$650 billion ($418 billion) of unlisted assets that they hold, as well as emphasising the quality of internal valuation procedures.

For instance, Aware Super told AsianInvestor that it now performs quarterly valuations for all directly held unlisted assets while requiring the same from the managers it employs. 

“For indirectly held unlisted assets, we ensure our asset managers comply with Aware Super’s valuation policy as well as international valuation standards or generally accepted accounting practices such as the Australian Accounting Standards Board (AASB) 13,” said a spokeswoman from the fund.

“We have a proactive, robust valuation governance process, including a dedicated valuations team that is segregated from investment decision makers, and use independent valuation experts to ensure our assets are fair-valued regularly, and our unit pricing is equitable to our members,” she added.

The spokeswoman added that the fund had implemented a policy of unscheduled valuations in times of particular market stress.

“Under our valuation policy, we proactively review the valuation of unlisted assets outside our normal valuation cycle where significant events indicate this is warranted.”

VALUATION TIMING

Historically, super funds have valued unlisted assets twice per year, typically in June and December. But falling prices in sectors like property over the last year have raised concerns about how accurately unlisted assets are priced, if valued infrequently.

“Whenever there are adverse market conditions, questions are reasonably asked about whether valuation processes are sufficiently timely and accurate,” said David Haynes, senior policy advisor at the Australian Institute of Superannuation Trustees (AIST).

Under guidance issued in July, APRA told super funds that it expected them to undertake quarterly valuations of unlisted assets, and even more frequently during periods where markets were volatile or there are major government policy changes.

Where assets are valued less frequently, APRA expects funds to provide an explanation for why the lower frequency is suitable.

Speaking on the publication of the guidelines in July, APRA Deputy Chair Margaret Cole noted that some super funds had already shifted their practices in line with the draft guidance, which APRA released for consultation in November 2022.

“Increased scrutiny is appropriate as the industry gets bigger, standards are raised across the board, and there are increased community expectations. However, it should also be recognized that volatility is a normal part of market cycles, and funds have long-term investment strategies that account for this,” said Haynes.

He pointed to the rapid price swings in certain assets such as Canva, a once-feted private Australian technology company whose value climbed to A$40 billion by September 2021, before falling significantly.

Earlier this year, fund manager T. Rowe Price cut the valuation of its stake in online graphic design platform company Canva by 68%.

The release of the July guidelines followed criticism of APRA’s oversight of unlisted asset valuations, in an independent review by the Financial Regulator Assessment Authority.

The review pointed to stakeholder submissions criticising the valuations of venture capital investment in Canva.

HIGH INTEREST IN PRIVATE ASSETS

In recent years, Australian super funds have increased their holdings of unlisted assets across property and infrastructure assets, such as airports, ports, and toll roads.

Haynes said the new guidance focused attention on super funds’ scrutiny of managers’ internal valuation procedures.

“It’s not the job of [super] funds to second-guess the valuations of externally managed assets, but to ensure that external managers have robust and verifiable valuation processes, and to have mechanisms in place to address any perceived failure of these processes,” he said.

The review also found that only 33 percent of super fund trustees agreed that APRA’s supervision of their industry was “very or totally effective”, compared with 63% of general insurance respondents and 74 per cent of bankers.