Unlisted assets and COVID-1909 Apr 2020 4 min read
Unlisted assets, for those who are unfamiliar with the term, include property, infrastructure, private equity and some alternative assets — they are referred to as ‘unlisted’ simply because they are not listed on a stock exchange. Some of these assets have been significantly affected (financially and operationally) by government-imposed measures to limit the movement of people and spread of COVID-19 globally. These measures have disrupted airports, retail shopping centres and company operations, as well as toll roads and seaports.
NGS Super’s unlisted assets are predominantly managed by investment managers, and are all valued by independent valuers monthly, quarterly, six-monthly or annually, depending on the particular asset. These valuations are reflected in the unit price of your superannuation investment.
We are actively engaging with our investment managers to ensure they have a clear basis for determining the frequency of valuation and any circumstances that would necessitate an immediate revaluation in between these valuations. In light of the evolving COVID-19 pandemic and its implications for unlisted assets, we recognise that additional monitoring is necessary.
We are working with our unlisted investment managers to understand the impacts on each asset, in a situation that is fluid and constantly evolving. There is a lot of focus on short-term credit stress, but it’s also important to assess the long-term valuation impact.
Impacts on 31 March 2020 valuations
The Fund’s investment managers have asked independent valuers to consider the impacts of COVID 19 in 31 March 2020 valuations. Where it has not been possible to meaningfully update cash flows to reflect likely COVID-19 impacts, valuers have predominantly looked at adjusting discount rates to capture uncertainty. In some instances, where appropriate, the manager has instead used the low point in an asset’s valuation range.
The majority of the 31 March 2020 valuation reviews for unlisted assets have been included in the Fund’s unit pricing earlier than usual to appropriately reflect the market conditions.
Significant disruptions to domestic and international airport operations due to border and movement restrictions are directly affecting revenue, while toll roads are affected by reduced commuter traffic due to restrictions on travel, trade and activity. Seaports remain operational but face supply and demand impacts.
The Fund’s infrastructure portfolio is highly diversified, which has provided some buffer. It includes a diversified mix of regulated and long-term contracted investments which provide some economic protection in this uncertain period. These investments continue to perform the role of providing long-term steady, secure income streams through fixed term contracts and long-term agreements.
Although there has been significant disruption to retail property, the Fund has a proportionately lower level of exposure to these assets.
Valuers are making more conservative assumptions to valuation metrics such as rental reversions, let up allowances, tenant incentives and capital expenditure allowances to take account of what is clearly a more difficult operating environment for retail property.
A lower level of debt/gearing across the Fund’s property portfolio protects the Fund from some of the negative effects of gearing and the need for higher liquidity levels to service debt, while exposure to international property has provided some positive currency benefit for the sector.
The Fund does not currently have a high private equity exposure, and the impacts will vary depending on the underlying operations of the portfolio companies. We have a larger exposure to healthcare and technology companies within private equity, which have proven to be quite resilient in the current environment.
Listed vs unlisted assets
Assets have been devalued across all sectors of the economy, but it is worth noting that current decreases in some of our unlisted asset valuations, based on our managers’ assessments, are less extreme compared to listed markets.
The basis for holding unlisted assets as opposed to listed assets is to provide diversification between assets and relative return stability through secured long-term income streams.
The Fund has exposure to listed and unlisted assets within the infrastructure and property sectors and they play significantly different roles:
- For listed assets, the latest valuation is typically readily available, there is much higher volatility and they are highly liquid. Pricing reflects market sentiment, which may not reflect actual asset value and gearing levels, which in listed property are typically higher.
- For unlisted assets, the Fund seeks to adopt an optimal independent valuation source in terms of transparency and appropriateness, and valuations tend to be more stable as they are based on estimated capital value and similar transactions. This means typically they will not experience the significantly high levels of value that listed assets reach; conversely, they are not expected to reach the lower level of valuation for listed assets.
The Fund’s trustee recognises that it has a duty to consider the latest valuation produced for incorporation into the calculation of unit prices. The Fund is monitoring the situation carefully and will continue to assess the potential impacts of the COVID-19 situation.
Ben Squires, CIO and Katharine Andrews, Senior Manager, Real Assets