Unlisted assets valuation practices – why are they so tricky?

Unlisted assets are more difficult to value than their listed counterparts.  Are you, as a unit pricing organisation, doing enough to appropriately value your unlisted assets?

Unlisted valuation of Canva

Canva is a prime example of the uncertainty around unlisted valuations. Back in September 2021, Canva – an unlisted Sydney-based graphic software design company traded on secondary markets, had a $US 40 billion ($55 billion) valuation. In March 2022, Franklin Templeton Investments – an American Capital Market company, wrote off a third of the value of its investment in Canva. The Franklin Growth Opportunities Fund only made this investment in December 2021.

Some Australian superannuation funds have also invested money in unlisted companies like Canva. Hostplus and Aware Super are two funds that both had a large investment in Canva but have had differing approaches in their valuation of the company. Hostplus used their private equity manager’s valuation for their end-of-financial-year statements as the Fund believes that their private equity managers have a more in-depth knowledge of the company and its key drivers. Unlike Hostplus, Aware Super changed their valuation of Canva before 30 June 2022, in between their private equity manager’s valuations. Such differing practices between superannuation funds can lead to materially different value of members’ investments in the same asset.

Revisions to SPS 530 – Investment Governance

APRA has long been concerned about valuation practices. In September 2021 APRA released a draft revision of SPS 530 – Investment Governance. In July this year, it released its final revision to SPS 530, which will be effective from January 2023.

One of the key revisions that APRA made was to make it necessary for a Superannuation Fund to have an adequate valuation governance framework, which consists of the structures, processes, procedures, and controls necessary to identify and manage the valuation risk of investments. As part of this framework, Funds must have a Board approved valuation policy. This valuation policy must include several items, but what we found was particularly important was the need to outline:

  • The roles and responsibilities of persons for the oversight and management of valuation processes and procedures
  • The circumstances under which independent external valuations are to be obtained
  • The circumstances in which interim valuations are to be made, to ensure the approach taken is consistent and transparent
  • The frequency of valuation of investments
  • The triggers that would require an interim valuation of investments outside of the frequency determined.

While APRA has only made this mandatory for registered superannuation entity licensees, we believe that such a framework should be implemented for any fund that publishes unit prices.

McGing’s unit pricing experience with unlisted assets

McGing performs reviews of unit pricing practice across financial services. Where a fund has a significant investment in unlisted assets, which are only revalued infrequently, one of the main recommendations we make is to value those unlisted assets as often as practical.

Independent external valuations

Ideally, assets should be independently and externally valued as often as possible, as doing this will result in a better “best estimate” of unit price. Better estimates of unit prices lead to greater equity among members who are exiting and entering the Fund. However, when it comes to unlisted assets, there is usually a large cost associated with such revaluations. This makes it impractical to frequently have these assets independently revalued. It is worth performing a cost-benefit assessment, including a better fairness/equity analysis to determine how often your assets should be valued to optimise equity outcomes.

Internal valuations

Internal valuations are another approach to revaluing unlisted assets. Internally valuing your unlisted assets may not be as dependable as independent external valuations but should be done in between external valuations. The following could potentially develop a better estimate of your unlisted assets between independent external valuations:

  • Movements in values of similarly listed or unlisted assets recognising any reasons for differences in valuation for listed vs unlisted assets
  • Up to-date indexes that track similar types of assets
  • Market interest rates or property capitalisation yields.

Conclusion

Frequently valuing your unlisted assets is an addition that is complicated and costly but is a necessary process for organisations. It is ultimately up to the responsible entity to set policy including guidance on how often that period may be, and the policy process and methodologies to use to ensure fairness and equity to members/investors.

Thanh

Thanh Phan works on unit pricing assignments at McGing.

 

Sources include AFR, SEC, APRA