Speaking at ASIC’s symposium on Australia’s public and private markets on Tuesday (10 June), Matthew Michelini, partner and head of Asia-Pacific at Apollo, agreed that inconsistent valuation practices between public and private markets undermine confidence in private asset pricing.
Michelini seconded a comment made by Peter Warne, non-executive director at UniSuper, who suggested ASIC could play a role in clarifying the purpose and methodology of private market valuations.
“In valuation, there should be principles around good valuation. And by and large, third-party, you either need some third-party independent evaluation agent coming in from time to time to evaluate those marks, or you need the benefit of having a third party validating the price from time to time,” he said.
“For us, almost everything that we do, especially on the credit side, we syndicate. We take some, we syndicate some, so there’s some price checks and price validation, and then we use third parties to mark that to market along the way for things that are illiquid.”
While Michelini acknowledged that the complexity of valuing private assets stems from differing holding periods and the diverse risk and liquidity profiles of investors, he emphasised that robust valuations are still essential for assessing overall portfolio risk.
As such, he suggested that regulators could issue general principles around valuation constructs, which, he said, most industry leaders would likely already be aligned with, with broader industry adoption to follow.
“Valuations actually are quite important in the private markets for a few reasons,” he said. “As an investor, you need to know your risk positions. Whether they’re public or whether they’re private, whether they’re in your I-can-liquidate-or-not-liquidate bucket, you need to know from a portfolio perspective what your risk positions are.”
In its submission to the regulator’s paper on public and private markets, Apollo Global Management similarly said any issues in the valuing of private markets can be “appropriately managed with robust governance and procedures”.
Apollo observed that many private assets, particularly those originated by non-bank lenders, are already distributed among large and sophisticated investors.
“Valuation teams across these investors observe industry-wide valuation practices and marks and validate via third-party valuation services,” the firm stated.
It also noted that as investment-grade private credit becomes more widely held, the dispersion in valuations across different firms “will continue to naturally decrease”.
Highlighting its own experience with firm-level practices, it said “strong valuation procedures, including requisite independence and third-party assurance, generally produce robust and reliable valuations”.
“Private asset pricing is supported by full access to management and detailed private information – frequent and in-depth company reporting and monitoring is often required via
stricter covenants,” Apollo said.
“In addition, valuations are often provided or reviewed by third-party pricing services as well as reviewed by external auditors on a recurring basis”.
Moreover, the firm pointed out that as public and private markets converge, private assets are priced with increasing frequency due to “improving private market liquidity, expanded use of technology, availability of quotes and other levels”.
“For example, certain Apollo products that include private assets are already priced daily,” it said.
Responding to widespread market concerns over valuation practices, ASIC chair Joe Longo acknowledged on Thursday that the regulator shares these concerns.
“We’re seeing some behaviours that aren’t very attractive,” Longo said at a lunch at AmCham in Sydney.
He elaborated that these include the different valuation methodologies.
“Some funds are getting really good, independent valuations and others aren’t,” Longo said, adding that the regulator is considering regulatory reform aimed at improving transparency in private markets.
