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Everything you need to know about unlisted assets
Unlisted assets, also known as private markets, have risen in prominence in recent years as investors become more familiar with the investment class. Since 2010, private market funds under management have increased 3-fold, with further growth forecast in future years. Most readers will own unlisted assets via their superannuation fund. Here we provide an overview in addition to the advantages and downfalls of investing in this asset class.
What are unlisted assets?
Unlisted assets are investments that are not listed on a public securities exchange. Subsequently, the valuation of a company is not decided by market participants, but by the owners or valuation experts hired to conduct an appraisal. Examples include:
- Private Equity – investments in private companies
- Venture Capital – investments in early-stage concepts and businesses
- Credit – loans to various third parties including real estate, small and large businesses
- Infrastructure – tolls roads, utilities, pipelines, digital networks, airports
- Property – residential, office, industrial, logistics, land for development, shopping centres
- Alternatives – artwork, jewelry, wine, vintage cars, cryptocurrency
Why invest in unlisted assets?
Generally speaking, owners of unlisted assets take a longer-term investment than public markets. Owners are less interested in the next quarterly earnings figure; but rather, what the business could be worth in five, ten or thirty years’ time. In the cases of property and infrastructure, the cash flows are relatively steady and economically resilient therefore providing regular income for owners in the pension phase.
Research has shown unlisted assets perform strongly in line with public equities but without as much volatility.
There is typically more information asymmetry in private markets, leading to potentially higher returns. Data and information are less freely available, therefore finding pockets of opportunity are more likely. However, this is rapidly decreased as the afore-mentioned inflows of the industry create greater demand for unlisted investments.
Private businesses also save on compliance costs of running a public company, which include investor relations, compliance and listing fees.
Some business companies are simply not suited to public markets, like agricultural companies. Crops cycles can be shorter or longer than a year, leading to volatility in financial results. Often these companies are better owned privately, with shareholders who intimately understand the growth and profit cycles.
Who owns unlisted assets?
Most households will own unlisted either directly (via a primary residence) or indirectly (superannuation, managed funds).
Typically the most common owner of unlisted assets is family-owned businesses or big institutional investors like pension or wholesale funds.
How are unlisted assets valued?
Unlisted assets are valued periodically, usually quarterly or at least annually – depending on their size and characteristics. The methods used to determine valuations are somewhat contentious since it is mostly open to interpretation.
Let’s say you own an office building. How could you value it?
You could look at comparable sales in the same area? But office buildings seldom change hands. You could value the land and the building separately? Possibly you could deduce the rental income expressed as a percentage of the price paid? Or as lettable square metres? You could even conduct a discounted cash flow model and arrive at a net present value. But depending on the discount rate, the valuation could look over or undervalued.
There is no right or wrong answer. But the key point it is part science and part art.
For companies backed by venture capital, typically the business will be valued at the last funding round or last secondary transaction.
Credit loans are valued at cost minus anticipated impairments or the likelihood of default.
What are the risks of owning unlisted assets?
The major downside of private investments is the lack of liquidity. If you want to sell your ownership stake, there is no liquid market to do so. This is commonly why private companies choose to mount an initial public offering (IPO) in public markets. Existing shareholders can exit investments while opening-up the company to many more potential buyers.
The other major risk, on which we’ve already touched, is valuation. You are trusting the asset manager to appropriately value the unlisted investment and not artificially boost returns by manipulating discount rates or using abnormal earnings estimates. When illiquid assets such as property or infrastructure assets are revalued upwards – unless the asset is sold – this is just a “paper” gain and not a real cash return. Just as assets can be revalued upwards, they can also be revalued downwards.
Not so much of a risk, but there is considerable friction when buying and selling unlisted assets. There is no central place to find buyers and sellers. Transaction costs are high relative to trading public assets.
A note on superannuation
With public markets becoming a crowded place to find outsized return opportunities, superannuation funds have increasingly looked toward unlisted assets. The AustralianSuper default “Balanced” option currently holds 32% of the portfolio in unlisted assets. Hostplus, the number one performing fund over FY22, allocated 42% of its portfolio to the asset class.
Super funds can put big sums of money to work and can partner with other long-term-oriented investors to fund big infrastructure and government projects.
As noted above, the valuation of each asset is open to interpretation. Therefore it’s best to check with your individual fund how it chooses to appraise unlisted assets and ensure the fund has sufficient liquidity to manage pension payments and redemptions.
Information warning: The information in this article was published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169
