Time to be clear about unlisted assets
Peter Swan AO FRSN FASSA
Professor of Finance at UNSW Australia Business School, University of New South Wales
Opinion
Australia’s emerging mega-funds must be made by law to disclose the presence and value of their unlisted assets.
David Gallagher and Peter Swan
Australian Financial Review Nov 17, 2021 – 2.56pm
The portfolio holdings disclosure debate in Australia continues to draw headlines and fierce debate among participants in Australia’s $3.3 trillion superannuation industry. What has not been critically stated in the debate is that in a compulsory system, the introduction of portfolio disclosure reforms for?both?listed, exchange traded assets and private, off-market unlisted assets would simply be good public policy.
Most of the consternation appears related to whether there should be any disclosure at all for unlisted assets and their periodic valuations.
Global capital has been deserting the highly regulated listed equity markets. In US equity markets, fewer IPOs and more firm mergers have reduced the number of listed firms by 55 per cent since 1996. Net disinvestment of $3.6 trillion has occurred as dividends and share buybacks have exceeded the value of IPOs.
There has been a surfeit of new listings including IPOs in Australia. But these are mostly small, and not on the radar of large super funds. In the meantime, super funds and other investment institutions are privatising assets in our large-scale listed sectors of choice, most recently?the $23.6 billion equity purchase of Sydney Airport?that is now the subject of an ACCC approvals process.
More and more of our infrastructure assets in ports, toll roads, electricity grids – many of them monopolies – are being taken away from both public and stock market scrutiny, even if they remain under the gaze of government regulators. No wonder industry funds, and their investment bankers, don’t want scrutiny while devising new ways to extract rents from their conglomeration of airport holdings and other monopoly assets.
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The consolidation of super funds is leading to the new age of the mega-fund. These large asset owners will be large net buyers of assets for a long time and likely increasing their sizeable asset allocations to long-term holdings of relatively illiquid private market assets.
Without systematic disclosure of currently “unobserved” assets, what is there to stop potentially unscrupulous fund managers from arbitrarily revaluing or devaluing such unlisted assets? This leaves super fund members unknowingly at a disadvantage in determining their investment options – including when members contribute new money to (or otherwise depart) an existing fund.
There can be no effective oversight of illiquid and essentially undisclosed assets by regulators or analysts without full disclosure of both the nature and value of these assets at regular intervals and scheduled at calendar quarter ends.
The disclosure of listed assets is a step in the right direction, discouraging fraud and/or systematic reporting of underperformance. But to make these disclosure reforms meaningful requires its extension to all assets,?both listed and unlisted.
The issue of stale prices?– which are not reflective of underlying assets priced in a market – has now become a major focus for market regulator ASIC, with 23 senior executives/trustees of super funds being investigated. Stale prices have been a focal point in the US mutual fund industry, which has been very well documented.
But the real problem is not stale prices but rather non-existent prices and valuations. Unless there are rules in place that can ensure fairness, investment flows involving super fund members should not proceed unless all assets can be accurately valued, priced by means of a transaction unit in a timely fashion, and fully disclosed to the investing public.
The industry fund sector points to?Australia’s sovereign wealth fund, the $200 billion Future Fund, which is proposed to be exempted from portfolio holdings disclosure, as a reason why they should also be exempted. The Future Fund has no functional or regulatory need to disclose either its listed or unlisted holdings.
But the reason for the exemption is simple: the fund has one single owner (the Commonwealth government), there is no legal structure of compulsion (in other words, it is not a super fund), it has all the legislative requirements governing its operations, it has been governed impeccably. There is also the Freedom of Information Act, for transparency purposes, if it’s ever needed.
Australia’s portfolio holdings disclosure gap in the superannuation system needs to be legislated. The introduction of these long-overdue transparency reforms will lead to increasing investor confidence, enhanced accountability and fairness, and improved regulatory oversight.
David R. Gallagher is at the RoZetta Institute Limited and is a former professor at UNSW Business School. Peter L. Swan AO is a professor of finance at UNSW Business School.