(L-R): Shrabastee Mallick, Seamus Collins, Ross Barry

Australia has some of the most lax practices in the world for the valuation of unlisted assets, raising questions about whether superannuation fund members are investing in a fair environment.

Infrequent valuations, poor methodologies and extremely long redemption windows in Australia run counter to the strict standards increasingly employed in the United States, the United Kingdom and Europe, according to Shrabastee Mallik, a senior consultant at independent asset and investment consultancy Frontier Advisors.

In a panel discussion with asset owners about the governance and valuation of unlisted assets at Conexus Financial’s Fiduciary Investors Symposium held in Sydney’s Blue Mountains region, Mallik said Australian fund managers typically use a “transaction-led valuation process” which allows a small number of fund managers to control the market.

The use of historical information to value assets also runs against global best practice, she said, pointing to the office market where the same historical absorption numbers are being used despite enormous changes to the market when compared with pre-pandemic levels.

And redemption practices in Australia are “probably the worst standard globally”, with some fund managers getting away with five or even seven-year windows, whereas funds in the United States, the UK and Europe have quarterly windows, Mallick said.

“You can get away with annual valuations…in a pretty stable market…but when you have more market movement, and you have interest rates increasing at the rate that theyre increasing at the moment, you know, quarterly valuations are what should be done,” Mallik said.

Questionable valuations

Questionable valuations lead to doubts about whether unit holders are getting an equitable price and operating in a fair market, she said.

“In an environment where you haven’t had many transactions, you need to rely on other valuation methodologies,” she said, pointing to a consensus-led evaluation process in the US and the UK where a group of valuers, auditors and agents gather to determine value based on a range of factors.

In the UK and Europe, better practices have meant asset values have corrected by 15 per cent to 20 per cent, even in strong sectors such as industrial property, she said. “You have seen those corrections in the market because they have approached it from [the perspective of]: ‘Well, even if we have no transaction evidence, we know the fundamentals have changed.’”

However, in a statement supplied to Investment Magazine after the event, a spokesperson for Frontier clarified the consultancy’s position that valuation standards in Australia “as a whole are good, but there are always opportunities for enhancements”.*

The spokesperson added that the majority of managers assessed by Frontier have sound valuation practices, noting that some have moved to quarterly valuations temporarily to reflect rising interest rates and inflation or respond to market volatility.

“Frontier as an organisation supports unlisted assets, including longer redemption periods which are fit for long-term capital and which prevent a run on managers, as occurred in certain asset classes during the GFC,” the spokesperson added.

In a survey undertaken during the panel session, only 8 per cent of participants had no investment in unlisted assets, and 45 per cent – the largest number of respondents – had between 21 per cent and 30 per cent of their assets in unlisted categories. A second survey found 70 per cent of respondents expected this to remain the same in the next 12 months.