Trustee boards fail to challenge unlisted valuations: APRA

APRA says there is room for improvement when it comes to trustees' oversight of unlisted asset valuations, finding most super fund boards don't question valuations.

In a letter to all RSEs, APRA reminded them of the need to have a robust asset valuation governance framework, after a survey it conducted in late 2023 showed funds, particularly small to medium-sized offerings, have a way to go.

APRA surveyed 45 RSEs, representing close to 100% of regulated entities' exposure to unlisted assets.

Most RSEs surveyed said there had not been any instance in which the board or relevant board-delegated committee challenging and/or overriding valuations provided by management since 1 July 2022. Most RSEs also said the same for valuations provided by an external party.

Further, four RSEs did not have checks and controls in place to ensure external manager valuations fall within a reasonable range. Seven admitted the same for independent external valuations.

APRA also found that some RSEs were not valuing their unlisted assets at least quarterly, as required under Prudential Standard SPS 530 Investment Governance. This was the case particularly for private equity holdings, with 14 RSEs failing to review their value quarterly. Ten RSEs admitted to not reviewing property assets quarterly, while eight admitted the same about infrastructure investments. Five said they do not review private debt allocations in line with SPS530 obligations.

APRA noted that of the main unlisted asset classes, "private equity and property stood out as the most demanding to value at least quarterly."

The area where APRA said it identified the most room for improvement was the use of revaluation triggers; some RSEs did not have predefined triggers or did not describe clear triggers for ongoing and interim valuations.

For those that do more frequent revaluations, the top triggers included increased market volatility or stress, a significant change to the outlook for an asset, global or market specific crises, and movement in comparable assets.

Finally, 12 RSEs said they do not include valuation risks and aspects of the valuation governance framework as focus areas in their annual or cyclical internal audit plans.

"Inappropriate asset valuations, especially during periods of heightened market volatility, may materially impact prices applied to member transactions, member equity and reported investment returns," the regulator said.

"APRA considers active and robust valuation processes, with strong oversight and governance, as critical elements within an RSEL's investment governance framework."