UK Pension Funds Rush to Sell Unlisted Assets Amid Concerns Over Private Market Valuations

UK pension funds are facing pressure to sell unlisted assets as regulators raise concerns about the true value of investments in the global private market. This has led to pension funds selling office blocks and private equity stakes at significant discounts. The Financial Conduct Authority is investigating private asset valuations and their potential impact on the financial system. This article explores the challenges faced by pension funds and the implications of selling illiquid assets at discounted prices.

Regulatory Concerns Over Private Market Valuations

Regulators are questioning the true value of investments in the global private market, prompting concerns among pension funds.

The Financial Conduct Authority is growing uneasy about the valuation of private market assets, including infrastructure projects and real estate. These assets have yet to be adjusted downwards, unlike listed markets that have experienced a historic rout due to higher borrowing costs.

Regulators are particularly concerned about the lack of marking down of private assets, which raises questions about the accuracy of valuations. The potential risks of over-valuation in the private market could have a knock-on impact on the financial system, including banks.

Impact on Defined Benefit Pension Funds

Defined benefit pension funds, which guarantee incomes to retirees, are selling illiquid assets at discounts, affecting their funding positions.

The 1.5 trillion pound defined benefit pension fund industry is feeling the impact of owning hard-to-value illiquid investments as financial conditions tighten. These pension providers are selling office blocks and private equity stakes at hefty discounts to the value marked on their books.

Due to their overexposure to illiquid assets, pension funds could face a shortage of ready cash in another crisis. Sales of these assets at discounts also dent their funding positions, leaving them vulnerable in volatile market conditions.

Concerns in the Real Estate Market

The real estate market is facing challenges as pension funds sell office buildings at significant discounts.

The property market in certain areas, such as London and Manchester, has come under severe pressure. London office vacancies are at a high, and property prices have declined. However, the index of global real estate fund returns shows only a minimal decline.

Pension funds are selling office buildings at discounts of up to 35%, reflecting the depressed state of the real estate market. This scrutiny on private market valuations is necessary to ensure accurate pricing and mitigate risks.

Challenges in Private Equity

Private equity investments are also facing valuation challenges, leading to discounted sales in the secondary market.

Private equity buyout performance has shown gains in recent quarters. However, in deals where private equity firms and investors buy and sell portfolios of investments, assets are being valued at less than their previous worth.

Stakes in buyout funds have been selling at around 85 cents on the dollar in the secondary market, with sellers accepting discounts in return for liquidity. UK-listed investment trusts holding private equity portfolios are trading at a larger discount compared to their reported net asset values.

The Need for Scrutiny on Private Market Valuations

The lack of marking down private assets raises concerns about the accuracy of valuations and potential risks.

Regulators and industry experts are calling for increased scrutiny on private market valuations. The infrequent marking down of private assets, often done quarterly or even annually, compared to the continuous valuation of listed securities, raises questions about the true value of these investments.

With the potential risks of over-valuation and the impact on the financial system, it is crucial to ensure accurate and transparent valuations in the private market. This will help pension funds and other investors make informed decisions and mitigate potential risks.

Conclusion

UK pension funds are facing challenges in the private market as regulators question the true value of investments. The lack of marking down private assets and the potential risks of over-valuation have prompted pension funds to sell illiquid assets at discounts. This raises concerns about their funding positions and readiness for future market crises.

Increased scrutiny on private market valuations is necessary to ensure accurate pricing and mitigate risks. Regulators and industry experts are calling for transparent and frequent valuations to provide pension funds and other investors with reliable information for decision-making.

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