PE immunises super funds from valuation noise
Private equity immunises superannuation funds from some of the noise regarding the valuation of unlisted assets, especially during a recession, according to Schroders.
Schroders alternatives director, Claire Smith, said in an Australia Institute of Superannuation Trustees (AIST) Superannuation Investment Week conference panel that the good thing about private equity was that it was based off fundamentals and noise could be eliminated from listed markets.
“These are long-term assets you intend to hold for a long time so you’re not trading in and out but if you have superannuation members entering and exiting that’s when it can cause issue when trading with a stale valuation,” she said.
“The good thing about private equity is that it’s based off fundamentals – you can eliminate a lot of noise from listed markets. A lot of people are focused on the valuation of private assets in super funds but what about the volatility in listed assets if you chose to exit your scheme when the market was down 30% and then it rebounded 20%, then that’s kind of bad luck.
“I’d like to think private equity immunises super funds from some of that noise.”
On private debt, Smith said it was also a hold to maturity asset so long as it was valued at par. She noted that if a manager thought a borrower would default and there was a payment of less than par then it would need to be accounted for but that this was likely to be covered by stringent worldwide accounting standards.
Pointing to concerns on the risks of over valuing unlisted assets, Smith said in private debt there were clear benchmarks when entering a loan that the spread was always in excess of what you would purchase a listed bond for.
“So, we always think if you sell out of a listed bond and you’re purchasing a private loan what’s the excess spread you can earn. It’s an easy figure to identify and the question is ‘how much do you value your liquidity?’ and that comes back to the question for the investor whether that be a super fund or insurance company,” she said.
With private equity, Smith said the big valuation question was how much capital was chasing deals and was the appeal of the asset class creating prices that were too high.
“In the private equity space we try and avoid the big wall of capital that’s chasing the large buy out deals. There’s a lot more capital chasing larger deals than smaller deals and we are focusing on that smaller end of the market because there is a lot less capital and a lot more deals,” she said.
“It’s not just a pricing question as it’s also a supply and demand question because it is an inefficient market with asymmetry. So, by avoiding those large deals we can still find very appealing prices.”
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