Growing private valuations scrutiny to benefit Asian asset owners
As their exposure to global alternatives continues to rise, asset owners in Asia are set to benefit from US, UK, and Australian regulators’ increasing scrutiny of private asset valuations.
While Asia hasn’t seen similar regulatory developments, Johnny Adji, Asia alternatives leader at consulting firm Mercer, believes such developments in other markets will lead to improved disclosures by asset owners in the region.
“Asian asset owners will need to follow the globally accepted market norms in terms of disclosure and valuation standards,” Adji told AsianInvestor.
“From what we are seeing in the market, Asian asset owners are increasing their disclosure [in a way] that is comparable to the US and Europe,” he said.
Since late 2023, US, UK, and Australian watchdogs have started reviewing the valuation practices of private assets as interest rates globally rose from historic lows, in an effort to address concerns about opaque prices and risks to portfolio performance.
The UK’s Financial Conduct Authority, for example, has been examining the accountability, governance, reporting, and general oversight of various valuation practices.
“A higher proportion of fund assets globally are now held in private assets where valuation practices are not as transparent as those for publicly traded assets. As more investors seek access to private markets, it is vital that they can trust that valuations are robust and reliable in all market conditions,” the FCA said in a letter to the industry on March 1.
RISING DEMAND
Global private market assets under management totalled $13.7 trillion by-end 2023, growing nearly 20% per annum since 2018, according to Preqin data. Its weight in global AUM also saw steady growth, accounting for about 15% by end-2023. Most private assets and market activities are centred in developed markets.
Several large asset owners across Asia are considering or planning to boost their alternatives allocations, such as Singapore's Temasek, GIC, Japan’s Government Pension Investment Fund, the Korea Investment Corporation, HSBC Life, and the Indonesia Investment Authority.
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The US Securities and Exchange Commission in August last year adopted new rules to require registered private fund advisers to provide quarterly statements detailing fund fees, expenses, and performance, and to distribute an annual financial statement audit of each private fund it advises.
In Australia, both the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority are ramping up scrutiny, as superannuation funds’ exposure to the private market increases, posing opacity risks to retirement savings performance.
Industry experts expect the trend of intensifying private market regulation to persist, bringing positive developments in the long term.
Charles River
“We think that’s going to continue to increase, especially if you look at private markets, which is becoming a bigger part of the market, meaning more impact. And obviously, valuations are a key indicator to that,” Alex Popp, global head of sales and account management for private markets at fund platform provider Charles River, told AsianInvestor.
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More regulation for private market disclosures is generally welcomed by investors, noted Angela Lai, head of APAC and valuations, research insights at Preqin.
Preqin
“Once the majority of funds improve disclosure standards, the rest will likely follow suit. So, it should be a positive development for the industry in the long term,” Lai said.
ESG ALIGNMENT
The ESG sphere is also driving unlisted asset transparency in Asia.
Across the region, the focus has been on climate-related risk management disclosures, noted Dominic James, partner at law firm Sidley Austin.
“The trends seen in Europe suggest tighter requirements may help advance ESG fund flows and encourage ESG-labelled fund launches, despite the additional compliance requirements,” James said.
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He noted that in the Asia-Pacific region, a mixture of factors is driving asset managers to embrace these developments.
These include mandatory disclosure requirements that are tied to assets under management, as well as rising investor demand.
“In general, we have seen international institutional and high-net-worth investors become increasingly focused on ESG initiatives in due diligence questionnaires,” he said.
“This has, to some extent, become a gating issue for fundraising and therefore is an important commercial imperative prompting managers to demonstrate alignment in ESG values,” he added.