by Naomi Rovnick and Carolyn Cohn
LONDON, Oct 9 (Reuters) – British pension funds overexposed to private assets are rushing to sell their unlisted investments, often at a discount, as regulators question the true value of investments ranging from real estate to private equity, according to industry sources.
Global regulators are concerned about the value of so-called private assets whose value on paper has not yet been revised downwards, while listed markets such as bond markets have posted historic losses due to the rising borrowing costs.
Defined benefit pension funds, representing 1.8 trillion pounds (2.079 billion euros) and which were at the origin of a crash in the British sovereign market a year ago, is one of the sectors more exposed to unlisted assets, which are difficult to value in a context of tightening financial conditions.
According to several industry sources, these pension organizations for retirees from the public sector and some private companies are selling office buildings and stakes in private equity firms at deep discounts to book value.
The UK’s Financial Conduct Authority is particularly concerned about the market situation, and is preparing to examine how private asset valuations are carried out, including whether overvaluation risks could have an impact on banks. .
Many assets have become difficult to value, particularly in real estate where transactions have collapsed.
“There has been very little opportunity to add value to (private) assets,” said Con Keating, head of research at Brighton Rock Group, a pension insurance company. “It’s crappy accounting.”
Defined benefit pension funds found themselves in trouble a year ago after a rise in government bond yields forced them to seek cash to cover margin calls on derivatives intended to hedge their pension payment obligations in the context of a relatively stable and low-yielding bond market.
As bond yields approach the levels pension funds were accustomed to before the 2008 crisis, their overexposure to illiquid assets could leave them cash-strapped in the event of another crisis, industry sources say. Sales of these assets at discounted prices also restrict their financing position, they added.
“No one knows where the next pension boom is going to come from,” said Henry Tapper, founder of the pension market analysis group AgeWage.
“But we are not sure about private market valuations.
RUSH TO THE EXIT
Defined benefit pension funds sell illiquid assets at discounts of up to 40% to their book value, said Paul Kitson, UK head of pensions advisory at EY.
He said the massive sale of commercial real estate and stakes in private equity firms by pension funds raises questions about the valuation of private assets.
Real estate markets in Germany and Sweden, for example, are declining significantly, while office vacancies in London are at their highest levels in three decades. Yet an index of global real estate fund returns produced by Burgiss fell just 0.7% in the quarter that ended in June.
“The property market is depressed,” said Ben Leach, head of private markets solutions at investment consultant Willis Towers Watson, adding that pension funds were selling office buildings at discounts of 35%.
“It’s the right approach to take a close look at valuations in private markets.
In a report published last month, the International Organization of Securities Commissions (IOSCO) said these valuations were “inevitably out of date”, with many private funds valuing their assets only quarterly or even annually, while listed securities are listed several times per minute.
PRIVATE EQUITY
Real estate is not the only sector to worry about.
The Burgiss Private Equity Buyout Performance Index, which takes into account cash generated and changes in company value, shows that global managers of these funds recorded a gain of 2 .8% during the first and second quarters of 2023.
But in transactions where private equity firms and investors buy and sell investment portfolios, assets are valued at lower values.
Wilfred Small, chief executive of private equity firm Ardian, said stakes in buyout funds had been selling for around 85 cents on the dollar in the secondary market since “early 2022”, when central banks began to raise rates, with sellers accepting discounts in exchange for liquidity.
According to Numis Securities, UK-listed investment funds that hold private equity portfolios trade at an average discount of 27% to the net worth (NAV) they report for their portfolios.
The average discount in the investment fund sector is 15%.
(Additional reporting Sinead Cruise in London, French version Corentin Chappron, editing by Kate Entringer)
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