EDHECinfra Post
Towards more frequent marks
Publication date: 2023-04-25

Recently APRA, Australia’s pension regulator called for comment on the update of “SPG 530 Investment Governance” – a Prudential Practice Guide. This, combined with the update to SPS 530 – the Investment Governance prudential standard is interesting for infrastructure investors. Key questions are what is happening, why, and what this means for infrastructure investments?

Firstly, what is happening? APRA is asking superannuation fund boards to improve their governance around valuations for unlisted assets. Superannuation funds are now required to create valuation governance frameworks that give the board of the fund comfort that the unlisted assets are updated regularly. Specifically, the prudential standard identifies that the valuations need to be updated in response to changing economic and social conditions. This is significant and it is increasingly important for pension managers around the world. These issues are now being raised by regulators elsewhere (e.g. Denmark’s FSA is worried about NAVs being stale). The new Long Term Asset Fund (LTAF setup) in the UK specifically for DC plans to access illiquids requires monthly valuations. More generally, regulators want to encourage the monitoring of the valuations of unlisted assets. And, if you have a chat with your auditors/valuers, I suspect they will confirm a new trend towards more frequent valuations in the infrastructure space.

To answer the ‘why’ we need to understand a little about the asset allocation of Australian superannuation funds. As at December 2022, the most recent figures, Australian superannuation funds had 16% of their funds in unlisted assets (in total). Individual funds set their own asset allocation and some have significantly higher exposure to unlisted assets. In response to the Covid pandemic, the Government allowed members to withdraw funds early. This resulted in a large liquidity event for funds, especially, funds with a large asset allocation to unlisted assets. If the funds allowed members to withdraw their money at the previous valuations (unaffected by Covid mitigation measures) then it would be unfair to members that kept their money in the fund. This is what APRA is trying to avoid with the new governance requirements.

With APRA paying closer scrutiny to the valuations of unlisted assets, what does it mean for infrastructure investors? For Australian superannuation fund investors, they are likely to have to build internal teams with the expertise to be able to value their unlisted investments. Importantly, these teams would need some up to date valuation metrics tailored to infrastructure investors, which coincidentally we provide. If you are looking to understanding how the recent increase in interest rates, inflation and changes in economic growth has affected the discount rates for infrastructure around the world, drop us an email at michelle.ho@scientificinfra.com.