Unlisted assets

We’ve had a few discussions recently with clients about unlisted and listed assets. Part of this is driven by the apparent stellar performance of industry super funds and other vehicles with large pools of unlisted assets: listed equity and property markets are down hard, but the valuation of unlisted assets has held up much better.

We believe that listed asset prices and unlisted asset valuations are not the same thing, and shouldn’t be confused. Under the accounting standards, an unlisted asset valuation is based on a model that estimates the value of the asset sold at a fair price in an unstressed market. On the other hand, a listed asset price is the price that an actual investor will pay for an asset right now with the market conditions as they are.

The Invesco Global Real Estate Fund invests in listed and unlisted property around the world, and the fund managers have noted that unlisted property is yet to be fully marked down for the rises in interest rates and disruptions in development:

[Unlisted property] price discovery is ongoing. As a result, in most markets the Q2 reported valuations are unlikely to reflect market clearing prices at this point in time, often as sellers are unwilling to compromise to the level required, leading some to reconsider transactions or pull deals. It is unclear
where final price levels will settle relative to current clearing prices.

They also note that over the long term listed and unlisted property have very similar return profiles.

A typical pattern is that listed prices of assets are more volatile in the short term but deliver similar long term returns. Generally, listed prices lead unlisted prices but overshoot in times of stress. Normally this is the premium paid to transact right now, rather than wait for markets to settle.

There’s a school of thought that investors should get higher returns for illiquid assets. But most consultants and multi-asset managers don’t believe that there is an illiquidity premium anymore. There are several reasons for this:

• Many investors prefer illiquid assets because they aren’t subject to mark-to-market accounting. (We’ve heard one multi-asset manager describe illiquid assets as a “legitimate cheat”.) This includes many retail investors, who prefer illiquid debt (term deposits and private debt) to listed government and corporate bonds.
• Large investment funds worldwide have plenty of cash expressly set aside to invest in private assets. Industry monitors estimate that this keeps valuations high.
• Asset owners could easily list most assets if they wanted to, either by listing directly or selling to a listed entity. So if they’re choosing to sell privately rather than list, we would have to assume that they aren’t selling at much less than they could get through listing.
• Long term historical returns for unlisted assets are not substantially higher than those for comparable listed assets. In some asset types pre-fee accounting returns often appear much higher, but cash returns after fees to investors do not.
• Most importantly, those valuations that we can see, such as when listed assets are taken private, are high. For example, TPG recently sold its telecommunications towers to a pension fund for 32 times their earnings. This is more than double the listed valuation of the stock.

Investing in illiquid assets seems reasonable for investors with long time horizons, a large enough portfolio to spread the risks around several investments, and willingness to forgo the flexibility to rebalance their portfolios dynamically to take advantage of opportunities. But the evidence doesn’t support the marketing of higher returns at lower risk.