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The widespread notion that infrequent valuations are misrepresenting the values of unlisted assets appears to be unfounded, according to a survey by Frontier Investment Consulting.
The survey of valuation practices by 70 investment managers of $90 billion in illiquid assets covering four sectors has found that the managers had reasonable valuation policies and were following reasonable valuation processes.
It tested to see what valuation polices the managers of 20 industry and not-for-profit finds had in place for 140 products in the infrastructure, hedge fund, private equity and property sectors, and whether these managers were adhering to them.
The survey followed demands from the Australian Prudential Regulation Authority that fund trustees increase monitoring of their unlisted assets amid concerns infrequent valuations were misrepresenting their values.
Listed property funds lost 57 per cent of their value in the year to February 2008 while the unlisted property index fell by just 5 per cent in the period.
Frontier managing director Fiona Trafford-Walker said the survey found there were five managers out of 70 that are not doing exactly as they said they would, but these related to relatively minor issues.
“The reality is that for most of the surveyed super funds, most of the assets are being revalued by their managers at the right frequency, and they are using independent valuers.”
The survey findings suggest that this “notion that unlisted assets have not been revalued and therefore values are set to fall is a bit of a beat up”, she said.
“People who say they will do so without looking at why the listed market has fallen so far, which essentially has a lot to do with listed market volatility.
“But is the value of a bridge, for example, really going to halve just because the value of its share price halved? It isn’t.”
Trafford-Walker said there is also a lot of leverage in many listed products and this has led to the valuations in listed markets falling a lot further than expected.
“That said, unlisted markets do need to reflect what’s going on in other parts of the market, and you’ve seen some of these valuations come down already.
“I mean, property is down at least 15 per cent, infrastructure is down by 10 to 15 per cent, and all those numbers that have already being booked in are in the valuations processes that clients have been following.”
