Sandra Lee, Head of Private Markets, UniSuper

Sandra Lee, Head of Private Markets, UniSuper

UniSuper to Increase Valuation Frequency

Fund Moves to Quarterly Valuations

UniSuper will increase its valuation frequency for unlisted assets at the end of the year, the fund said during a discussion of valuation governance at the Frontier Annual Conference.

UniSuper will move to quarterly valuations for the majority of its unlisted assets at the end of the year.

Currently, the $125 billion fund values certain directly held infrastructure and property assets still on a six-monthly basis, but Sandra Lee, Head of Private Markets of UniSuper, said the decision was taken on the back of regulatory encouragement to value unlisted assets more frequently in the wake of the coronavirus pandemic.

“From UniSuper’s perspective, from 31 December this year we will go from a biannual process to a quarterly process. And this is for all our directly held infrastructure,” Lee said during a breakout session at the Frontier Annual Conference held in Melbourne last month.

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rom UniSuper's perspective, from 31 December this year we will go from a biannual process to a quarterly process. And this is for all our directly held infrastructure – Sandra Lee, UniSuper

“Private equity is always a little bit more interesting because that’s sort of subject to particular GPs in that fund. But generally, they get conducted monthly to quarterly, similar for our property pooled funds as well.

“In terms of our direct property assets, they will move into a quarterly schedule from December this year.”

UniSuper has about $23 billion in unlisted assets, which represents just under 20 per cent of the total fund. Like many other large superannuation funds, UniSuper has been increasing its exposure to unlisted assets in recent years.

The merger with Australian Catholic Superannuation & Retirement Fund in December 2022 and a healthy pipeline of deals accelerated the growth in exposure to unlisted assets in recent months.

Regulatory Scrutiny

In light of increasing allocations to unlisted assets, the Australian Prudential Regulation Authority (APRA) has been adamant about its desire to see more frequent and robust valuation metrics in the industry.

It has held a consultation process on Prudential Standard SPS 530 Investment Governance, which covers valuation practices and it issued draft guidance in November last year.

In the draft, APRA emphasised the need for a clear and documented valuation methodology that is underpinned by “appropriate assumptions that are regularly reviewed”.

“This would involve the RSE (registrable superannuation entity) licensee considering how the methodology avoids overreliance on historical data and trends, achieves variation in asset class characteristics over time and responds to the challenges of modelling unlisted or illiquid assets,” the regulator said in the draft.

During the breakout session, Lee also emphasised the need for accurate valuations and said this meant adopting a conservative approach to valuations wasn’t always appropriate.

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People always think that just because you're coming out with a conservative valuation that that's a good thing for some reason. I would argue that you can be conservative on the upside, you can be conservative on the downside, but probably the best answer is you should be most reflective of the current market – Sandra Lee, UniSuper

“People always think that just because you’re coming out with a conservative valuation that that’s a good thing for some reason. I would argue that you can be conservative on the upside, you can be conservative on the downside, but probably the best answer is you should be most reflective of the current market,” she said.

“We’re always challenging our valuers to say: ‘If you were to pop this asset on the market tomorrow, do you think your recommended valuation would hold?’ It’s a good way to think about it.”

To ensure the third-party valuers remain sufficiently independent from UniSuper, the team changes valuers every five years. Lee also emphasised that valuers had access to the management team of directly held assets if they had any questions.

Finally, she stressed the investment team does not modify any data it receives from an unlisted asset’s management team.

“I’m not going to sit here and mention names, but sometimes when a financial model goes from an underlying investee company to the investor – and that investor can be a principal investor like UniSuper or potentially a fund manager – there could be adjustments that are made to variables that could sometimes, in our view, be counterproductive, because it’s favourable, potentially, for that intermediary, that manager, to adjust values that potentially could be linked to higher fees,” she said.

“We are very big on ensuring that the financial models that we hand off to the independent developers are not adjusted by my team. This is to ensure that there’s proper independence.

“Our view is you’ve got an expert management team that runs an airport, so they come up with traffic forecasts [and] a whole bunch of other operating assumptions. And whilst we go through that and do a reasonableness check, we don’t like to alter key assumptions.”

It was also important to ensure the team had the ability to do out-of-cycle valuations, as happened during the COVID pandemic in 2020, she said.

“We all found out within a couple of weeks in March 2020 that the world was shutting down. So as an investor in transportation, airports and toll roads, it’s not great news, clearly,” she said.

“The borders shut down across the globe and what does that mean for all of our assets? It wasn’t just UniSuper, a couple of our peer funds conducted out-of-cycle valuations, just to make sure we could accurately reflect the latest market conditions.

“We don’t use that ability often, but we can do it. We don’t just sit there and go: ‘Oh, we can’t do anything. We have to wait for the next scheduled valuation, which is six months away.’

“Clearly, that just doesn’t make sense.”

Assessing External Managers

Sarah Cornelius, Senior Consultant at Frontier Advisors, also emphasised the importance of out-of-cycle valuations to the robustness of the valuation governance framework.

“If you’re looking at a valuation policy, one thing that would stick out as a bit of a red flag to me is if there’s no provision for interim and out-of-cycle valuations,” Cornelius said during the session.

“It depends a little bit on the asset class itself, but whether there is that level of independence that would be some of the areas that I would think about.”

Having an independent and robust framework for valuing unlisted assets has become increasingly important, not just because of the higher regulatory scrutiny, but also because these assets make up an increasingly large part of fund portfolios, she said.

And funds might want to review not only their internal processes, but also those of external managers, she said.

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If you're looking at a valuation policy, one thing that would stick out as a bit of a red flag to me is if there's no provision for interim and out-of-cycle valuations – Sarah Cornelius, Frontier

“The investments are increasing in number and scale, together with more direct and co-investment structures as well. We’re also seeing more internal asset management and they’re all factors which make a valuation governance framework really important,” she said.

“The implications, however, of not getting valuations right include the member equity risk, reputation risk, but also [it has an impact on] performance and portfolio allocation decisions.

“So it really drives home the importance of having a fit-for-purpose valuation governance framework. That’s about having the right delegations, the right skills, appropriate segregation of duties and robust oversight.

“[It is about] looking at the external managers, what their valuation policies are and identifying any gaps and engaging with them as required. And also thinking about training sessions at the director level, so understanding what the regulatory landscape is and potentially even doing deep dives into particular unlisted asset classes,” she said.

Valuations and Property

Brett Lazarides, Head of Investment Governance at Frontier Advisors, said different asset classes came with their own problems when assessing valuation practices, especially when held by external managers.

“If you think about adjusting a private equity portfolio, which may have 100 underlying companies invested, versus an infrastructure portfolio, which may have six big lumpy assets, then the valuation methodology is different in both those asset classes,” Lazarides said during the session.

Property assets face a different set of valuation challenges again, largely because in this sector it is common practice to look at historical transaction data to derive valuations, he said.

This practice can be problematic when transaction volumes have been low and can lead to distortions in valuations.

“There has been a slowdown in market sales because there’s been a lot of uncertainty. Demand has fallen as interest rates have risen and effectively large asset owners and managers are sitting on their portfolios,” Lazarides said.

“Now that sort of leads to the question: ‘Are your prices still accurate in the absence of a market transaction?’ Probably not.

“And this goes to the point that different asset classes have different valuation challenges. In this case, [valuations] are almost certainly not accurate if you are doing nothing about re-evaluating and revaluing.

“I think it’s a frailty in the valuation industry for property. The valuers choose that approach; they choose to rely on actual market sales before changing established cap rates.

“That is a gap and a risk.”


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