How should our pensions value unlisted equities?

I was shocked when I read that many of the valuations of private equity funds are carried out by employees of the funds. I am pleased to hear that the FCA are looking into this practice and I hope that as soon as possible , funds are required to get an independent valuer to ensure that the offer price for units reflects the value of the underlying assets.

To use an easy analogy, Imagine buying a house where the valuation is carried out by the estate agent selling the house. Guess what, the house values at 100% of the price put on it- by the estate agent. You have no transparency, the only validation of that price comes from you!

It is a function of a weak market that such practice still exists. The reports of the FCA’s move to probe this practice is reported in the Financial Times, I’m pleased to see that Jo Cumbo is among the reporters that have contributed to Laura Noonon’s story.

There is no reason why private equity has to be bought as a fund. It can be packaged into an investment trust and bought as a listed security quoted on a public market. The value of your share in that trust is established by the market. The market may, and often will, discount the value of the assets against the valuation given to the assets by the managers of the trust. This represents a scepticism that those valuations could be reached, even I understand these mechanics.

But I am totally at a loss to understand the “mark to model” valuations that private equity use to value their unquoted stocks. I have read the work of many critics of private equity who point out the opacity of the process and I have waited for news that  independent valuations would become a standard feature of the offer.

There is of course a way to make that happen without the FCA having to intervene and that is to write it into the statement of investment principles of each fiduciary that buys private equity with other people’s money, that the fund must be independently valued.

The value we get for our money cannot be established by the people who profit from the valuations. This is particularly the case in DC pensions where those taking decisions are doing so on behalf of ordinary citizens who haven’t the faintest clues about the financial markets into which their money is invested.

Of course, the UK is not alone in this. The same conversations are going on in Australia , which has a similar system of fiduciary management of default investment funds where the retirement income is dependent on investment performance. The same conversation should be happening in the wealth management sector, where private equity is targeting the SIPPs of those with money to spare to invest in these sophisticated areas.

The FT tells us

The exercise, to be kicked off by the FCA by the end of the year, comes as global regulators grow increasingly uneasy about the potential for blow-ups in private assets and other markets following the abrupt reversal of more than a decade of low interest rates.

This cannot happen soon enough. Secondary banking is rife in our pension system. Markets are funded by pension schemes and – as the LDI blow up showed – just because everyone is investing “that way” does not make “that way” safe.

Let’s hope the FCA get to the root of the problem quickly and do not find the market blowing up , while they are still investigating.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , . Bookmark the permalink.

5 Responses to How should our pensions value unlisted equities?

  1. conkeating says:

    The ONS FSPS reports private equity investments as reported by DB schemes unchanged at £81 billion year on year. Credible??

  2. Byron McKeeby says:

    In my last century experiences of private equity investing, I took some comfort in what was known as “the J Curve”.

    In that experience most, if not all, investments were initially written down and then kept at relatively low valuations, so that when investments were realised they generally (but not always) showed significant uplifts. These tended to put the private equity managers in a better light with their investors.

    I now read that the J Curve is “dead”.

    I also suspect auditors may not have helped with their marking (to market or model), dogmatically opposing conservatism and prudence in valuation methods.

  3. Eugen N says:

    Simple solution: Do not use private equity! Invest only in listed equity and securities which trade daily.

    In a way this makes me laugh, why valuation matters? It only matters when you invest in a fund and when you disinvest. The values are established by people, in both for private equity, they rarely buy from the market or IPO back in the market!

    Do people think that if the value is established by markets, those are better? They just get a combined opinion of market participants.

    Remember that markets have no infinite liquidity, and if many people want to sell at once the price they get may have nothing to do with the value of the assets.

    It would be better some pension advisors go an watch the “Dump money” movie, lots to learn from that.

  4. Pingback: VFM from public relations? Journalist Louise Farrand walks the line | AgeWage: Making your money work as hard as you do

Leave a Reply