Manipulated valuations: WeWork vs your Superannuation

WeWork put its Initial Public Offering on ice this week as the company realised it would not be valued at the $47 billion that WeWork wanted. Indications are that WeWork would struggle to raise money with a $15 billion valuation.

The process WeWork took to get a $47 billion valuation is instructive for anyone with money invested in a Superannuation fund with significant unlisted assets.

WeWork is an unlisted company. Which means WeWork is not traded on a stock market, instead it is owned by a small number of investors. It also means WeWork traded infrequently – in this case, whenever WeWork needed more money.

The problem is that valuations were done by WeWork or a handful of investors based on what they thought they could eventually sell WeWork for. One major investor in WeWork, Softbank, has booked significant favourable investment performance based on the increase in theoretical value that Softbank imagined had occurred. Now Softbank will need to reverse those gains.
For investors trading in or out of Softbank in the meantime, it is a problem as the billions of dollars of gains simply weren’t real.

A similar situation faces much of the Superannuation sector. Now I’m not suggesting all unlisted assets will need to be written down by two thirds like WeWork. But I am saying we just don’t know whether the reported performance is accurate or not.

As I wrote earlier this year:

This is the issue when comparing funds that invest in listed assets vs ones that invest in unlisted assets – you have no way of knowing the actual value of the unlisted assets. A great example is unlisted property funds during the financial crisis. Unlisted property funds invest in effectively the same assets as listed property funds, the underlying properties are worth the same, the performance differs because of how it is reported:

The problem with unlisted asset valuations

Do you really think that while listed property prices fell almost 60% over a year, unlisted property prices had increased slightly over the same year? They both own the same buildings, it is just that unlisted assets don’t get valued regularly and so the values being reported were the values from prior years and didn’t reflect the actual market value.

By this stage, unlisted property funds weren’t trading anyway and so you couldn’t sell your unlisted asset at the inflated made-up prices – who would want to buy unlisted property assets at last year’s prices when you could get listed property assets at almost 60% off?

So, this is the trillion dollar question. Is an unlisted property trust less risky than listed property? There are a lot of people who say yes as the reported prices are less volatile – but my emphasis on the word “reported”.

For me, if it is the choice between owning an asset:

  1. in a listed vehicle where I can see what is happening, how much it is worth and buy/sell at any time, or
  2. in an unlisted vehicle where I don’t know what is happening, the asset can only be sold at infrequent intervals and the valuation is a mix of prices from prior years and management estimates

then I will take option 1 every time. Just because I can’t see the price move doesn’t mean that it hasn’t.

On average, Industry Funds have about a quarter of their assets invested in unlisted assets. For some, the figure is much higher. Which means the level of uncertainty is higher.

With full disclosure, some of my rant is probably sour grapes! We run superannuation funds at Nucleus, and it is all in liquid listed instruments – investors can see each and every underlying holding. We don’t have anywhere to hide. Some months I wish we had 25% of assets in unlisted funds that could be strategically revalued…

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Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.

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Damien Klassen

Damien has a wealth of experience across international equities (Schroders), asset allocation (Wilson HTM) and he helped create one of Australia’s largest independent research firms, Aegis Equities. He lectured for over a decade at the Securities Institute, Finsia and Kaplan and spent many of those years as the external Chair for the subject of Industrial Equity Analysis.
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Comments

  1. Oh wow… for any lay person reading this…. this is 5 star post!!!

    It has been known for quite a while that the reason for industry fund outperformance compared to retail funds is 75-100bps per annum from lower fees but also 75-100bps per annum from overstating performance on alternative/unlisted assets

    • Which leaves an interesting possibility.

      Could you shift to a a half-dark fund when you’re pretty sure a downturn is coming, wait for the downswing, and then shift your funds at the listed nominal price to a totally listed fund and capture the upswing?

      Losses cushioned and profits maximised.

      • Mtaa super in the gfc marked down their unlisted assets a good 12 months after most industry funds. so in early 2009 they had the least losses out of all the competitors. Some people got double burned by moving away from existing fund after a haircut then going to mtaa…. to then get another haircut half a year later

      • In 2009 I drew down 100% of my mortgage facility and loaded up on listed AREITs. For the next 5 years I averaged a return of 30% per annum. Dividends paid the mortgage interest. Easiest money I ever made.

    • Since RG97 come into force, you can no longer say Industry Funds are cheaper, they’re more expensive for the most part.

      The main reason for ‘out performance’ is them being disingenuous with risk profile classification, when they compare retail ‘balanced risk profile vs industry fund ‘balanced risk profile’.

      For example, HostPlus says it’s default ‘balanced risk’ option is 74% growth assets and 26% defensive assets. pg 67.

      https://pds.hostplus.com.au/-/media/Files/Hostplus/Hostplus-Member-Guide/PDF-Generation/HOSTPLUS-Member-Guide.pdf

      However looking at the breakdown, I would only classify ‘credit’ as a defensive assets, pushing it into 93% / 7% territory.

      Of course they’re going to out perform 70/30 portfolios.

      However, most retail 90/10, and definately 93/7 portfolios outperform HostPlus’ balanced portfolio’.

      This is endemic across the board.

      Apple with Apples for once.

      • HostPlus is most certainly an issue (as are other funds), but to suggest that the average retail multi asset fund has outperformed the average comparable (by asset allocation) not for profit option after fees is simply not true.

        The issue is complex but the logic is simple, these funds are able to by the same assets as retail funds, their scale allows them to purchase the exact same manager talent for a much lower fee and they don’t need to capture the difference as a profit margin.

        Pick almost any retail managed fund, call it 0.80 fee for the retail investor, your insto investors are paying 0.3 or less for the exact dame fund.

      • “not for profit option after fees is simply not true.”

        It is true because of the impact of RG97.

        It has uncovered they way Industry funds have been getting paid without (prior) disclosure.

        There are people making ‘profit’, higher fees means less return. Compare the array of borrowing costs and property (management) costs between industry funds and retail funds. The likes of Kerr Nielsen’s fees are long gone, you’re getting diversfied retail options for 15-35bps now.

        This has affected return.

        • Those retail diversified options for 0.30bps are passive funds (or some combination of passive and enhanced index strategies). That is not a like for like comparison with many (not all) industry super style funds.

          Yes, RG97 has increased fee disclosure (for now) but regardless of what was apparently not disclosed before, the net after fee returns reported for both sectors has not changed. The after fee return of one sector is still superior (on average) to the other (and that is an even worse outcome for retail funds if industry fund fees have actually always been ‘higher’). That is changing, retail is getting better, but just as you can by a retail index balanced fund all in for 0.31 bps, a large insto, not for profit insto can sell it for 0.1 bps + $5 pw.

          It’s a complex issue and unlisted asset and hidden fees, while a nice narrative for retail players under pressure, is not the whole truth.

  2. You can’t say that the “value” of a listed property fund is the same as its share price in a market crash. Share prices fall as investors rush for the exits, and it matters not what the underlying value of the asset is, people just want their money out of the market. Arguably the “value” of a commercial property asset is based on its cap rate, which is based on its yield. So regardless of share prices rising and falling, the asset value doesnt change. Only the listed funds premium or discount to NAV. This is why listed property fund share prices rebounded so quickly once the GFC crisis was over, as share prices moved back to reflecting underlying NAV. Of course, if funds are forced to offload physical assets in order to meet redemptions, or because bankers call in loans, then the flood of stock will then depress asset prices in the asset market. However, once confidence and liquidity in those markets is returned, prices usually go back up to normal cap rates (assuming they were at realistic prices prior to the market crash and not in bubble territory). Falling share prices of listed property stocks where the underlying NAV and yield hasnt changed, is a classic Buffet example of “stocks on sale”. If you want to make a valid comparison, you should be charting the reported NAV of listed property stocks, vs the NAV of unlisted ones, in order to determine whether unlisted funds fudged revaluations.
    Your argument is better suited to those funds holding unlisted companies that make no profits – as there is no way to “value” that company, other than what you think some greater fool may pay for it. The assets Blue Sky Investments held, such as Shoes of Prey, fall into this category.

    • Even StevenMEMBER

      I only partially agree with you, Kiwikaryn. The fear factor from the GFC was certainly very real at the time. It wasn’t just an irrational sell off in listed property trusts. I was working in investment management at the time.

      The fear was of an imminent depression (not a recession). And it extended well beyond LPTs and into the broader market. Bank share prices were down 60-70% from their peaks. BHP and Rio debt was yielding 15%+ pa.

      Was the fear irrational? Well, the worst certainly didn’t eventuate. But I’m still broadly in Damien’s camp. I’d rather know what the true ‘price’ is (as reflected by trading dynamics) rather than a superfund’s view of long term or fundamental value. In an extreme, the latter perspective means you would never change the value of your investments as you always assume your model/factors will revert back to long run assumptions.

      • You seem to miss my point – which is that while fear drove share prices down, they did not drive down actual property prices, so there was no drop in “value” only an increase in the listed funds discount to NAV. To make it clearer, during the GFC could I have bought the Rialto Tower in Melbourne for 60% below its registered valuation?

        • Even StevenMEMBER

          Sharemarket investors saw a potential doom-laden scenario unfolding. Property investors and their tenants were broadly oblivious (my interpretation dealing with both).

          Which represents the true value?

          NB: I’m not a supporter of perfectly efficient markets. Sharemarket investors were pricing in Armageddon. Property investors, valuers etc were pricing in a passing sea breeze. In my view sharemarket was a little closer to reality.

          What we are talking about is a timing difference. A value should reflect all available factors/inputs. Property industry broadly had their head stuck in the sand and didn’t incorporate the disastrous scenario that could unfold in the near term.

    • Damien KlassenMEMBER

      If you were an investor in listed property and you needed the money during the financial crisis then you had to sell at a loss of 60%. If you owned an unlisted fund then the fund claimed that your money had increased, but they locked it up and you couldn’t access it at all… for the investor that needed the money (say in a pension phase), the loss of 60% was way more real than the paper increase in a locked up fund.

      • I agree. But that is unrelated to how registered valuations of actual buildings were undertaken, and claiming that unlisted funds fudge those registered valuations. Share prices are determined by market sentiment, not asset valuations.

  3. WeWork is a complete scam. This is an email from AngelList talking about WeWork from August: https://angel.co/newsletters/welcome-to-the-age-of-co-working-161

    Several things are interesting here, but the big one is this, “Community-specific co-working spaces. The Wing, which WeWork is an investor in, is a network of co-working and community spaces designed for women.”

    Who is the Wing? And while bigotry against men is totally acceptable in the current year, what exactly is The Wing? Link: https://www.instagram.com/the.wing/

    On their instagram page, up front is: https://www.instagram.com/p/B2XrA14H7h4/

    Is this normal for a co-working space? Really? Listen you stupid f*&ks – the Wing is a coven. Like really a coven of witches. These satanic pieces of sh*t are what is plaguing our world. They actually believe in Satan and do exceptionally dodgy (beyond the pale stuff with kids etc).

    This specific coven reports way up the food chain, wait a minute: https://www.thecut.com/2018/04/last-night-the-wing-welcomed-hillary-clinton-into-the-coven.html – not quite at the level of the Dark Mothers, but everyone has to start somewhere right?

    Thing that will really freak you out. The satanic pedo’s who run the progressive cult actually believe that in doing evil they will bring about the end of humanity and they will be rewarded by the morningstar. Here is the good bit – they are not the crazy ones, you are.

    Be cool though – we are absolutely winning. And all the ‘market moved 666 points today’ is coming to an end.

    Of course, you will not take this seriously. Riddle me this, why does Kabbalah, Vedic Math etc work? No seriously. Why do so many believe in sex magic ala Jeffery Epstein. What do you think was actually happening on pedo island?

    For thousands of years, the struggle between good and evil has been chronicled by the great religions of the world. The demons of hell have been fought with flame and sword, and the blood of patriots.

    But you, you are moderns. So enlightened, so progressive. None of this stuff is real right? I mean, you are clearly so much smarter than you’re ancestors were… Clearly…

      • Lol… you know that great line from Groucho Marx – I don’t want to belong to any club that would accept me as one of its members, and no club I want to be a member of will have me.

        something like that…

  4. A good point about valuations and reported returns. Subjective conflicted valuations are always suspect. The valuation of CDO’s, prior to the 2007 meltdown, is a good example.
    Now so far as Wework goes, it is unadulterated millenial BS.

  5. The Govt should require all funds to have their unlisted assets independently valued on at least a quarterly basis.
    The same auditor/review also should not be utilised two qtrs. in a row.

  6. plebngineerMEMBER

    WeWork – customers *cough* creatives who will drop their subscription at the slightest hint of hardship. All they’ve been doing is spending up big on leases and fitouts.

  7. Come on Damien, while your overall points are valid there is a little bit of hyperbole here.

    – Unlisted v listed high grade commercial property is hardly comparable to unlisted private equity valuations of tech darling.

    – The ARIET market is quite a bit different to the the unlisted property markets. A significant portfolio of that index is devoted to corporate activities, funds management, developers etc, all of which have very different risk profiles to the underlying real estate the may hold.
    – The AREIT market also carried significant levels of leverage pre GFC, in many cases, this was significant enough to destroy the underlying companies and impair otherwise quality assets. The (quality) unlisted assets where also leveraged, but on average, no where near the levels of of the listed market. That alone was a critical factor in the performance differentials.

    I take no issue with questioning anyone claiming ‘risk adjusted’ return benefits from simply holding unlisted assets, but lets not overplay the hand.

    • Damien KlassenMEMBER

      Sure there were differences and leverage made a big difference. But do you really think by mid-2008 that unlisted property had increased in value (and then locked up so that investors couldn’t withdraw) while listed was down 60%? We can argue whether unlisted should have been down 30% or 45% or 60% – it doesn’t matter as (a) the value was nothing like what investors were being told it was and (b) investors couldn’t get the money if they needed it anyway…

      I agree with your point that private equity is much higher risk than unlisted property or utilities. Many industry super funds have significant holdings in all three.

      • No argument there, any unlisted asset will have valuation lags, at that is why it’s important to ensure the stated liquidity of the vehicle matches the assets (and I note a few industry funds have moved towards gating provisions now). technically, any asset is only worth what one will pay for it at any given point, plenty of assets were priced at zero during the GFC which was not a refection of value, but liquidity. Listed vehicles were certainly liquid, but many would argue the values were also way off (if the listed market didn’t operate like that, there would be no basis for your fund??)

        We should also remember that many of these funds are not subject to the extreme cash flow scenarios you have outlined. Some have mandated SG inflows, even those without a mandate can still forecast contributions with a level of volatility retail funds would love to have. You also have the defined benefit components of these funds. All these factor place those large funds at a structural advantage vs the retail punter whom wants all the return with daily liquidity. unlisted assets are far more palatable for them.

        Unlisted assets are a risk, some funds will end up possibly over exposed and members will pay the price, but placing to much emphasis on this suggests that the average Jo should run for the hills from their large scale pension fund in favour of a daily liquid variety (where they or someone else can move from risk on and off as they please). Almost all available historical evidence suggests this would be a bad move for mum and pa jo!

  8. This issue is why Industry Funds had to be excluded from the Super royal commission.
    Otherwise the fund outflow would have likely caused the collapse of the property market long ago.

    • “This issue is why Industry Funds had to be excluded from the Super royal commission.”

      LULZ,

      Australian Super – Board of Directors … https://www.australiansuper.com/about-us
      Dave Oliver – National Secretary Australian Manufacturing Workers’ Union
      Julia Angrisano – National Secretary Finance Sector Union
      Paul Bastian – National Secretary Australian Manufacturing Workers’ Union
      Don Russell – Principal Adviser to the Hon Paul Keating
      Daniel Walton – National Secretary Australian Manufacturing Workers’ Union

      HostPlus – https://hostplus.com.au/super/about-us/leadership-team/board-of-directors
      Alexandra Grayson – Finance Sector Union
      Tim Lyons – Assistant Secretary of the ACTU
      Judith Hill – Secretary of the Australian Insurance Employees Union

      CBUS – https://www.cbussuper.com.au/about-us/how-were-run/board
      Steve Bracks – Premier of Victoria
      Glenn Thompson – National Assistant Secretary AMWU
      Rita Mallia – President CFMEU
      Frank O’Grady – President CFMEU (Victoria)
      David Noonan – National President CFMEU
      Michael Zelinksy- Assistant National Secretary AWU
      Earl Setches – Federal Secretary Plumbing Trades Employees Union
      Kara Keys – ACTU National Campaign Coordinator.

      Care Super – https://www.caresuper.com.au/why-caresuper/about-us/our-people/board
      Julie Bignell – National Vice President Australian Services Union
      Keith Harvey – National Industrial Officer Federated Clerks Union
      Alessandra Peldova-McClelland – Legal & Industrial Officer Unions NSW
      Robert Potter – Assistant National Secretary Australian Services Union

      Why they didn’t get put in front of the RC… a real mystery…

      “Otherwise the fund outflow would have likely caused the collapse of the property market long ago.”

      They’re part of the Ponzi… the UTMOST regard for the benefits or workers is “How many hows of my labour do I require to afford shelter/food/water/energy”..

      You know, all the stuff Maslow thinks are pretty important needs. They’ve failed dismally.

  9. I can’t quite agree with this. The best returning investments are not usually listed. In fact a lot of them eventually become listed ONCE the owners feel it’s time to sell up/cash out. Most low risk/high return investments normally have a barrier of entry of some kind and are usually privately held (i.e. why would you want to sell them while the returns are high and you have control?). I’ve seen a few companies like this where they would rather pay cash bonuses because they were so confident in future growth they didn’t give equity to most staff.