UniSuper is on track to increase its allocation to unlisted assets by about 5 per cent due to a healthy pipeline of deals and the merger with Australian Catholic Super, John Pearce tells [i3] Insights.
UniSuper is on track to increase its allocation to unlisted assets by about 5 per cent of the total portfolio compared to 18 months ago.
The increase is part of a deliberate strategy to grow its exposure organically and the fund has a number of deals underway, which are likely to be finalised in the coming weeks, including a large investment in a European telecommunication tower business, as well as an investment in a forestry operation.
But part of the increase is also the result of the recent merger with the Australian Catholic Superannuation and Retirement Fund, John Pearce, Chief Investment Officer of UniSuper, says in an interview with [i3] Insights.
“We actually increased our unlisted exposure by virtue of the fact that we merged with [Australian] Catholic Super and they had a proportionally higher level of unlisted assets in their portfolio than we had in ours. So we’ve got an increase through that avenue,” Pearce says.
“Then we’ve done a couple of unlisted property deals, and we’ve got a couple of deals in the pipeline, and we’re working on a reasonable size private equity allocation.”
We actually increased our unlisted exposure by virtue of the fact that we merged with [Australian] Catholic Super and they had a proportionally higher level of unlisted assets in their portfolio than we had in ours
He says he is quite happy with the investments Australian Catholic Super made in the unlisted space and hasn’t felt the need to get rid of them, but they did tend to be structured differently to how UniSuper typically structures investments.
“We were very comfortable with their exposures. Now, it is different to the types of exposures that we have because given their size they were doing a lot more fund investing than we do,” he says.
UniSuper tends to prefer direct and co-investments over fund structures.
Pearce says he made more changes to Australian Catholic Super’s public asset portfolios since UniSuper has an in-house investment team.
“We were able to absorb a lot of those types of strategies with our in-house portfolios. We’ve got a pretty heavy in-house Australian equities capability and that’s one of the reasons we can actually make these mergers work, because of this in-house capability you’ve got some real economies of scale,” he says.
Recent Deals
UniSuper is on track to finalise a number of private market transactions, which Pearce says is partly the result of less activity in the market.
Although this hasn’t necessarily caused prices to drop dramatically, the team has been able to close deals at better rates and on more favourable terms.
“It is not so much on the pricing side; it is not that we’re seeing forced selling in the market, as in: ‘I need to liquefy at any price.’ What we’re seeing is that deals are nowhere near as contested as they used to be,” Pearce says.
“And the terms you can do them on, the governance rights that you can command, are much better than they were 18 months, two years ago.”
UniSuper is in the process of finalising a large investment in a European towers business, as well as an investment in a forestry operation in the coming weeks.
“If we were doing those same deals 18 months ago, we don’t think we would have got it at the same price because it would have been much more heavily contested,” Pearce says.
It is not so much on the pricing side; it is not that we're seeing forced selling in the market, as in: ‘I need to liquefy at any price.’ What we're seeing is that deals are nowhere near as contested as they used to be
The reason behind the lower activity in the private space is not so much due to a widespread liquidity crunch among institutional investors, but has more to do with the fact unlisted asset valuations haven’t decreased as much as those of listed market assets. This has blown the balance between listed and unlisted assets in portfolios out of proportion.
“What we’re seeing is this denominated effect where the asset allocation balances need to be rejigged because unlisted obviously has not taken the hit and their listed exposures have taken quite a hit,” Pearce says.
“They found themselves overweight unlisted assets in terms of their SAAs (strategic asset allocations). So it is fairly orderly; it is not this mass liquidation.”
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Listed Versus Unlisted Valuations
The discrepancy between the valuations in listed and unlisted markets has made some investors worried about potential upcoming falls in unlisted asset prices.
It also has drawn the attention of the local regulator, the Australian Prudential Regulation Authority (APRA), which is concerned about the fair treatment of superannuation fund members who buy into potentially overpriced assets.
This issue became especially clear during the coronavirus pandemic when members tended to switch more between investment options and the government allowed for early release of super money for those experiencing financial hardship.
APRA has been vocal about its desire to see more frequent and robust valuation metrics in the industry.
“APRA expects RSE (registrable superannuation entity) licensees to have robust board-approved valuation policies and procedures,” the regulator wrote in a report in 2021.
“The absence of robust policies and procedures for the imposition, monitoring and review/adjustment of revaluations creates the risk that decisions made by RSE licensees in a crisis are sub-optimal or are not made in a timely manner. This increases member equity risk.”
Pearce acknowledges there are problems, but says they tend to be more pertinent in some sectors than others.
“People tend to put unlisted in one bucket, but there’s at least three key buckets: private equity, property and infrastructure. Clearly, where the biggest discrepancies are is in private equity,” he says.
The basis of valuation is more varied and far more subjective here. For example, when you look at your so-called YUCs, Young Unprofitable Companies, in the US last year, then they were down 80 to 90 per cent. But when you look at the private equity funds with a similar set of companies, then some of them weren't even taking their marks. That is where I think the biggest discrepancy is
“The basis of valuation is more varied and far more subjective here. For example, when you look at your so-called YUCs, Young Unprofitable Companies, in the US last year, then they were down 80 to 90 per cent.
“But when you look at the private equity funds with a similar set of companies, then some of them weren’t even taking their marks. That is where I think the biggest discrepancy is.
“We are now in this world where there is a cost of capital and there is a proper curve, and guess what? Silly little things like profits actually really matter.”
However, he warns that increasing the frequency of valuations alone is not enough. He says the quality of the valuation process needs to improve as well.
“If you look at quarterly revaluations, is that going to improve [the situation]? I’m not sure, because if the evaluations are wrong, then it doesn’t matter if you report it more often,” he says.
He is not concerned a fall in unlisted asset prices will impact UniSuper to any great degree.
“We are in a good spot because we’re buying. If valuations are coming down, then that is fine by us,” he says.
Decarbonisation and the Energy Transition
Decarbonisation has been on the minds of many institutional investors as there has been growing support for mitigating the worst effects of climate change among lawmakers globally and the population more broadly.
Unlisted assets, in particular infrastructure, are disproportionately impacted by this trend compared to other assets as many utility and energy facilities are still in government or private hands.
But the war in Ukraine and the subsequent spike in energy prices has caused a bit of a rethink on the subject. Pearce says there has been a little more room for subtlety in the discussion around decarbonisation and the path of the energy transition.
“There is more discussion around this notion of an orderly and just transition, whereas before you couldn’t entertain any discussion other than ‘just get rid of fossil fuels’,” he says.
An orderly transition is important not just for those employees who work in impacted sectors, but also to ensure real progress is made in fighting climate change, he says. He is worried that if politicians lose mainstream support, the whole process will quickly lose momentum.
“This whole energy transition has got mainstream support; everyone understands the need to decarbonise, but that could change if the lights start to go out,” he says.
“Once you’ve got that, then mainstream support turns against it, then there goes the political will.
“That is when we’ve got a real problem. Let’s hope we can just have a sensible discussion about an orderly transition.”
But he is positive on this front and has already started to observe some anecdotal change in attitudes.
“Europe has been really leading the way when it comes to climate change and decarbonisation. But now when I talk to people who are hooked into the big investors, particularly in London, then they say that they’ve been surprised you can now have a pretty objective discussion about gas [with them],” he says.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.