Asset owners cautious as private market valuations come under pressure

Scott Haslem (left), Jeremy Larkin, Kelvin Mak and Jessica Melville

Asset owners are increasingly wary of private market valuations, fearing that falling stock markets could be a harbinger of valuation pressure in unlisted markets.

Jessica Melville, head of strategy and research for medium-risk portfolios at AustralianSuper, noted that stock markets have fallen significantly and AustralianSuper’s medium-risk portfolio has seen this in its listed infrastructure and investments. in REITs, which raises the question of what will happen in unlisted markets.

“There’s a reason to be cautious and there’s likely overall downward pressure,” Melville said, noting that the fund is “very keen to maintain that valuation discipline.”

However, she noted that transaction activity is still strong and “you can’t help but recognize that there’s this weight of capital still chasing private assets globally.”

Speaking in a panel discussion at Conexus Financial’s June Fiduciary Investor Symposium in Blue Mountains, Melville said AustralianSuper had recently reduced risk in its medium-risk portfolio – which is mainly focused on real assets – by reducing its exposure to liquid and listed investments. .

Detailed estimates

IFM Investors’ private equity team undertakes detailed assessments every quarter according to Jeremy Larkin, executive director of private equity at IFM. With rivers of capital pouring into venture capital in recent years, Larkin found earlier this year that there was a “disconnect” between his team and some of the founders he dealt with.

“And that was because, I would say, they were on a venture capital funding infusion where they had only raised, say, three or five million dollars, but they would increase it to higher and higher levels high and the prospect of a round drop was a complete anathema to them, Larkin said.

“Ultimately, all markets are interconnected. At the moment, I think venture capital is the disconnect in the rest of the system as it has been priced on the latest mark, rather than benchmarked on underlying fundamentals.

There’s been a “wake-up call” and the fundraising rules are “about to be rewritten…so I think that’s where the rift is going to be in the whole system,” Larkin said.

With an allocation of around 17% to private equity at its last portfolio update in March and inflation expected to rise, Australia’s Future Fund is taking a close look at private markets and “investments that perform well in an environment high inflation,” said Kelvin Mak. , director of private equity at the Future Fund.

The buyout side of private equity is an important part of the fund’s portfolio, Mak said, because “larger companies have more market power and push for more price increases in a high inflation environment.”

While the fund reviews venture capital opportunities and sees them as “an excellent entry point to examine innovation and exploit technology”, it is also “cautious about valuations across the board”.

With “a lot of pressure” on growth and venture capital funds, “managers are starting to reconsider their valuation policies,” Mak said. “We know that some of them apply discounts for lack of liquidity or conservatism.”

But the impact of that could take at least six months to “ripp through the system”, he said. “A lot of our venture capital or growth companies still have some cash left, so I don’t know if you’re going to see the immediate effect in the next quarter or the next two quarters.”

Unlisted assets

Crestone Wealth Management – ​​a high net worth and ultra high net worth family office and charitable wealth manager with approximately $25 billion in assets under management – ​​does not do valuations because it invests in funds, said Scott Haslem, chief investment officer of Crestone.

But Haslem agreed there was “clear downward pressure” and the fund was increasingly thinking about the role unlisted assets play in the portfolio.

With interest rates low for such a long time, this has been problematic for the design of client portfolios, with a significant shift in allocation from fixed income to real assets, Haslem said.

“So what’s interesting now is that people have turned some of their fixed income allocations into real assets where you get a similar risk and reward profile with no liquidity,” Haslem said. “But most of our clients don’t really care about liquidity.”

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