The Australian Prudential Regulation Authority (APRA) has put the country’s A$3.6-trillion ($2.4 trillion) superannuation industry on notice, demanding stricter and more timely valuation practices for unlisted assets.
The incoming regulation is unlikely to impact the smaller super funds in the industry who typically use external fund managers to gain exposure to private assets — instead, the scrutiny will fall on the larger funds who take on the task of investing and valuing these assets themselves.
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Sandra Lee,
UniSuper
At UniSuper, which falls comfortably into the top 10 of the largest super funds, with A$125 billion in assets under management (AUM), these regulations are hardly a cause for concern, according to Sandra Lee, head of private markets, UniSuper.
“Our directly owned unlisted assets are independently valued on a quarterly basis. We consider this to be best practice and in our members’ interests,” Lee told AsianInvestor.
“We also arrange for out-of-cycle valuations for particular assets when the circumstances warrant.”
ILLIQUIDITY RISKS
Australia’s superannuation funds have been steadily ramping up their exposure to these private assets — such as private credit and infrastructure — both locally and abroad over the last few years.
Until now, these private assets have not been subject to frequent revaluations which has raised APRA’s concerns that it could lead to increased illiquidity within funds, as private assets are typically harder to sell quickly.
This illiquidity risk is especially troubling in the event of volatile market conditions, which are ever present in today’s climate, as it could compromise the funds’ ability to adequately serve their members’ needs.
UniSuper’s Lee said the fund’s portfolio is prepared to withstand such conditions, while committing to fair valuations and liquidity.
“We hold sufficient cash holdings to meet our liquidity requirements under various market conditions,” she said.
“Member equity is an important issue, and we welcome any move to improve it. The recent focus by the regulator is more related to private equity exposures. We have a smaller allocation to private equity funds, certainly not large enough to materially impact crediting rates,” said Lee.
The bulk of UniSuper’s unlisted exposure is in high-quality property and infrastructure, and Lee remains confident in the fund’s valuation process.
POSITIVE CHANGES
The regulatory changes initiated by APRA could potentially lead to some improvements in how superannuation funds manage and value their unlisted assets, according to Andrew Boal, partner and actuarial consultant at Deloitte Australia.
Boal expects the regulator to compare valuation practices across various funds, potentially identifying and sharing best practices to enhance methods where needed.
Andrew Boal,
Deloitte
“You would probably expect some lifting of the bar. Where there are any deficiencies in some areas, even if they’re only minor, they will be rectified,” Boal told AsianInvestor.
Boal also raises an important consideration regarding the integrity of asset valuations in relation to a fund’s performance metrics.
For many funds, their exposure to unlisted assets provided a buffer to their losses in 2022, which was recorded as the super industry’s worst returning year since the global financial crisis in 2008.
There is an implication that maintaining asset valuations could be used strategically to influence a fund’s standing.
Boal does not believe this is likely to be occurring within the industry.
“It would be very shortsighted, but that would be one of their concerns, that if you downgrade an asset and then underperform, that will damage your brand, and maybe lose some members and cashflow,” he said.
Ultimately, Boal suggests that while improvements can be made, the existing frameworks are sound.
“A lot of funds will already be having independent valuations done by external firms as well. So I think that we’ll find that a lot of the process is pretty robust.”
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