How Australia’s Superannuation Funds Value Unlisted Assets Amid Regulatory Calls to Change

Art by James Yang

As Australia’s superannuation funds increase their investments in unlisted assets, the Australian Prudential Regulation Authority, which oversees many of these entities, found gaps in valuation governance and other issues in its latest review.

These plans controlled A$3.7 trillion ($2.3 trillion) as of December 2024, and APRA estimates about $500 billion is invested in private assets. The regulator says the funds have progressed in their asset-valuation approaches since APRA’s 2021 review, but there are still gaps. APRA’s report found room for improvements “in either or both their valuation governance or liquidity risk management frameworks.”

Specifically, APRA expressed concerns about potential conflicts of interest, management and board oversight, how often funds revaluate holdings and what triggers a revaluation, relying on external managers for private asset valuations, and fair value reporting.

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Industry watchers say with their technical capabilities, superannuation funds can address APRA’s issues by standardizing how they value unlisted assets and could become a leader in private market valuations for asset owners.

How Supers Evaluate Holdings

Matt Olsen, director of manager research ratings at Morningstar Australasia, which is starting to expand its evaluation of superannuation funds, says Australian accounting standards allow several approaches to valuation, including looking at identical or comparable assets, replacement costs, present value of cash flows and other methods. What matters is the process. “It’s important that people apply consistent approaches and that they’re independently verified,” he says.

Josef Pilger, an independent global pension and retirement expert, says Australian superannuation funds employ classic valuation methods any asset owner would use. He concurs with Olsen that it’s the consistency of valuation practices when it comes to unlisted assets for many asset owners, not just supers.

Because private markets are still relatively immature, compared to public markets, how various entities value the same assets will likely be different because there isn’t a standardization about what something is worth, even in the same organization, he says.

Australian superannuation funds have invested in private markets for years, but up until about a decade ago, it was mostly through external managers, Pilger says. It has been only recently that they have started to build direct private market capabilities in-house.

The issue for asset owners overall comes down to what he calls investment governance and valuation governance maturity, that people who estimate valuation have the sophistication and the experience to know where to focus, have the right processes in place, the correct amount of oversight, and other necessary criteria.

“It’s securing broader outcome resilience. You have enough oversight and scrutiny, but also insights into (an asset) so that you can actually be comfortable that the investment outcomes that you’re communicating are actually sustainable,” he says.

Greater Availability of Data

Ashby Monk, executive director at the Stanford Research Initiative on Long Term Investing, says Australia’s superannuation funds’ investment in novel technologies and processes allow them to do more sophisticated valuations. The funds use artificial intelligence technology to extract valuation data from PDFs sent to them by general partners, collecting and storing that information in central databases to do valuations at scale. The question is how much information sharing they can negotiate with external managers.

“I think they are the world leaders in private market valuation, from an asset owner perspective, they are going to drag the world forward,” he says. “I think APRA is setting a pretty high standard, and they are demanding a lot from their superannuation funds. Obviously, that’s painful if you’re in the superannuation seat, but given the request APRA is making, I see enormous progress happening there, and the hope I have is that progress will come to the rest of the world.”

How often and how quickly funds should revalue their unlisted assets depends on a few factors, such as if they have direct ownership of an asset or if they get information from external managers. Pilger says if a super relies on outside organizations for data the super must wait until the manager squares its books, which automatically means a lag. Quarterly valuations are useful, but being able to do internal valuations can add an extra level of sophistication, Pilger says, especially in volatile markets.

Olsen says Morningstar would like to see the superannuation funds address the same concerns as APRA. It would prefer quarterly valuations, but the key principle for supers is the need for a fair-value reporting at the end of a reporting period. If there is not, the super needs to explain why.

Olsen and Monk say the regulator’s valuation concerns come down to fair treatment of beneficiaries who may be entering or exiting the fund and not being disadvantaged by the timing of the exposure to a particular private investment. Monk says unlike purely defined-benefit pension funds, many superannuation funds are only defined-contribution plans, so members can leave at any time to join another.

“The overarching theme here is around the fair treatment of superannuation members…. You need to be able to strike a valuation as people move from one superannuation fund to the other, giving them equitable treatment across funds,” Monk says.

The question about fairness and valuation are not without precedent. Last year the HESTA super fund paid two cohorts of members who were impacted by the fund’s downward valuation decisions in March 2020, at the beginning of the Covid-19 pandemic. APRA was concerned that the decision-making processes surrounding the original valuations was not adequate nor fair.

CIO magazine reached out to several Australian superannuation funds for comment, but all either declined or did not respond to questions by deadline.

Mary Delahunty, CEO of the Association of Superannuation Funds of Australia, a policy, research and advocacy organization for the superannuation industry, said in an emailed statement to CIO regarding APRA’s review, that superannuation funds operate consistently within the regulator’s expectations.

She said funds surveyed generally adopted a quarterly valuation cycle, with some larger funds carrying out more frequent independent valuations of asset classes with a higher valuation risk, and that superannuation funds generally use a governance committee or group for valuation oversight. For externally managed assets, funds often placed high reliance on the investment manager’s valuation policies and processes, especially for investments accessed through investment platforms.

“APRA has noted that, as the proportion of superannuation funds’ assets invested in unlisted assets such as property, infrastructure, credit and equity continues to increase, addressing risks related to valuation governance and liquidity risk management is a critical issue for the industry and a priority for APRA,” Delahunty said.

Regulation Varies by Jurisdiction

For much of the of the world, including the U.S., regulation of retirement plans is rules-based, Pilger says. Rules-based oversight has advantages in the level of prescription and regulatory details but has limitations. “The regulation is more ‘help me to keep me out of trouble,’ not necessarily ‘help me to make my business better,’” he says, also noting that few asset owners in the U.S. directly invest in unlisted assets.

Pilger highly rates regulators in Australia, the Netherlands, the U.K. and Singapore for their principles-based approach. “It’s far, far, far more flexible and far, far, far more accommodating,” he says, adding, “They are highly sophisticated, very much focused on thinking a little bit more holistically.”

In Canada, he says rule-following is less about the regulator’s approach as it is the sophisticated governance framework asset owners have built. “They’re highly driven by trying to do the right thing, to drive the right outcomes,” he says.

Pilger says when it comes to the regulatory landscape that’s best for asset owners, the principles-based approach shows itself with how countries invest in unlisted assets.

“I think it correlates very strongly to the level of sophistication when it comes to directly investing in private markets,” Pilger says.

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Tags: Alternative Assets, Association of Superannuation Funds of Australia, Australian Prudential Regulation Authority, Governance, illiquid assets, Regulations, superannuation in Australia, valuations

Larry Fink, chairman and CEO of $11.5 trillion asset manager BlackRock Inc., wants to expand investor access to alternative investments and warned that too few Americans are saving for retirement in his annual chairman’s letter.

Fink writes that the assets that will “define the future”—including data centers, ports, power grids and the fastest-growing private companies—are out of reach for most investors, only accessible by institutions and high-net-worth individuals.

“The reason for the exclusivity has always been risk. Illiquidity. Complexity. That’s why only certain investors are allowed in,” Fink wrote. “But nothing in finance is immutable. Private markets don’t have to be as risky. Or opaque. Or out of reach. Not if the investment industry is willing to innovate.”

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Fink highlighted BlackRock’s recent acquisitions of private credit firm HPS Investment Partners, infrastructure manager Global Infrastructure Partners and alternatives data firm Preqin, pushing the firm beyond being a traditional asset manager.

“BlackRock has always had a foot in private markets. But we’ve been—first and foremost—a traditional asset manager,” Fink wrote. “That’s who we were at the start of 2024. But it’s not who we are anymore.”

The 50/30/20 Portfolio and Infrastructure

Fink’s letter suggested the standard portfolio of the future will include allocations to stocks, bonds and private assets, the latter acting as a diversifier, with infrastructure playing an important role. He described a new standard allocation of 50% stocks, 30% bonds and 20% alternatives. The traditional 60/40 stock/bond portfolio may well be a thing of the past.

“Generations of investors have done well following this approach, owning a mix of the entire market rather than individual securities,” Fink wrote. “But as the global financial system continues to evolve, the classic 60/40 portfolio may no longer fully represent true diversification.”

Fink noted three benefits of including infrastructure in a portfolio; inflation protection, volatility protection and strong historical returns. According to BlackRock, adding infrastructure to both a 60/40 portfolio and a pension portfolio increases returns and decreases portfolio volatility.

Also according to BlackRock, $68 trillion in infrastructure investment will be needed between 2024 and 2040, which Fink described as the equivalent of building the U.S. interstate highway system and its transcontinental railroad every six weeks for 15 years.

But for infrastructure investments to make sense for individuals and for retirement accounts, Fink called for the deregulation of infrastructure permitting.

“We can’t democratize investing if it takes 13 years to build a power line,” Fink wrote, noting that it typically takes longer to permit infrastructure projects than it takes to build them. “Giving retirement investors access to infrastructure matters less if the infrastructure never gets built. That’s often the case today.”

Investing for Retirement

According to a January BlackRock survey, 33% of Americans have no retirement savings, 51% are more worried about outliving their savings than about dying, and one-third of Americans would have a hard time paying an unexpected $500 bill.

One way to fix the “retirement gap” is to increase access to alternative investments in 401(k) plans, according to Fink.

“We’re going to need better ways to boost portfolios,” Fink wrote. “As I wrote earlier, private assets like real estate and infrastructure can lift returns and protect investors during market downturns. Pension funds have invested in these assets for decades, but 401(k)s haven’t. It’s one reason why pensions typically outperform 401(k)s by about 0.5% each year.”

According to BlackRock, that additional 0.5% every year, when compounded over 40 years, will result in 14.5% more money in a 401(k) plan by the time of retirement. “Or, put another way, private assets just bought you nine extra years hanging out with your grandkids,” Fink wrote.

Still, there is a long way to go before alternative investments become ubiquitous in employer-sponsored defined contributions plans. While the number of plan sponsors implementing alternative strategies in their plans has increased, sponsors are often faced with lawsuits by plan participants alleging that such investments are violating the plans’ fiduciary duties under the Employee Retirement Income Security Act.

The illiquidity of these assets is another issue.

“When you invest in private assets—like a bridge, for example—the values of those assets aren’t updated daily, and you can’t withdraw your money whenever you want,” Fink wrote. “It’s a bridge, after all—not a stock.”

But Fink is confident that alts will play a role in the retirement accounts of the future.

“Asset managers, private-market specialists, consultants, and advisers all play a role in guiding 401(k) providers. That’s part of the reason I’m writing this letter—to cut through the fog,” Fink wrote. “We need to make it clear: Private assets are legal in retirement accounts. They’re beneficial. And they’re becoming increasingly transparent.”

Another important financial wellness tool for American, Fink wrote, is expanding emergency savings.

“No one invests for retirement if they’re worried about paying for a flat tire or ER visit tomorrow,” Fink wrote. He called the emergency savings provision of the SECURE 2.0 Act of 2022 “just a start” and suggested, “We can simplify the rules further, raise contribution limits, and enable automatic enrollment in standalone emergency accounts.”