Jerome Lander

Do you think the behaviour of these funds is fitting for fiduciaries? Is it equitable to clients, or appropriate, or ethical, not to mark down the assets to reflect fair value. Do we condone or accept this sort of conduct as an industry? It has the short-term benefit for the fund of making the investment performance appear artificially better than it is, for a while - a clear case of agency risk. Furthermore, it obviously incentivises the informed to sell and get out, as you rightly point out - at the expense of those remain.

Anthony Golowenko

Thanks Dominic for your insights in this article. Many points well made. In this current debate on unlisted illiquid investments, I believe context is important - particularly investment time horizon. In undertaking a 5-year unlisted investment, the manager has (or should have) certainty of capital committed, which therefore drives the illiquidity premium. Where the current debate seems somewhat contentious is in determining fair value (NAV) and equating this to observed daily share prices. I'll use the example of Elanor Commercial Property Fund (ASX: ECF). Recently migrating from an unlisted past, the listed Fund's 'market price' has collapsed to circa $0.95 (from a $1.25 issue price). ECF's ASX release of 25th March 2020 provides appropriate context on the underlying fund attributes, including distribution guidance. Valuing these cashflows in an unlisted setting over a 3- to 5-year investment horizon - based on underlying assets, tenancy profile, occupancy, gearing, etc - would very likely NOT result in a fair value (NAV) adjustment to $0.95, the observed share price in fearful listed market environment. As your article illuminates, portfolio composition, the role of each underlying strategy component, and alignment with investor's objective(s) is central to this discussion - appropriate diversification across a range of dimensions. My comments seek to provide some balance to this debate, where an unlisted investment's role to 'provide a foundation of regular income' over a medium-term investment horizon need not be swept up in (fearful) daily pricing. (Disclosure: Recently purchased, Elanor Commercial Property Fund (ASX: ECF) is held in my SMSF)

Matt Christensen

Great article. Your truth-telling on IPO Wealth has no doubt helped many with their lifesavings and deserves huge huge praise. I found your 2 alternative funds example to be most enlightening. Agree with Jerome Lander. Unethical for investors to not mark down assets to the latest transaction price (where a true change of economic interests has occurred), assuming they had a chance to bid higher and did not. In these instances, the lower transaction price surely should prevail for valuation purposes. In the often grey and opaque unlisted space, a lot comes down to where the valuer/owner sits on the spectrum of conservative to aggressive. For unlisted project investing (mainly property); I've seen carrying-values calculated using as high as 35% discount-rates, and others as sharp as 5%. For 10-20 year projects, varying input rates will change present-value calculations enormously. I think added disclosures supporting valuations, that outline the primary method/assumptions backing valuations is pivotal. Also believe it is safest (that unless stated otherwise), best to assume all Net Asset Values have not been calculated using liquidation pricing (with brokerages + cost of crossing spreads factored in). This liquidation differential is obviously more relevant on high esoteric and low liquidity names.

Michael Whelan

Dominic - great article. A big issue is the Asset Consultants 'directed' many, many funds to get into illiquid, unlisted infrastructure.....and here we are, for better or worse (mostly worse). Anthony - I think, in effect, Matthew has answered your question with his 'Comments'.