Q41: What are unlisted assets?

There are benefits and pitfalls in owning assets that don’t trade on a public exchange.

In the world of investment, both listed and unlisted investments play a significant role in diversifying portfolios and generating returns. While listed investments, such as shares and bonds, are easily accessible and tradeable on public exchanges, unlisted investments offer unique opportunities that can enhance a portfolio’s performance. They’ve also been in the news lately with some Australian super funds allocating large amounts of investors’ funds to these types of investment. Super funds love unlisted assets because their value is not transparent; that is to say that — unlike exchange-traded assets such as shares — there’s no published daily price. Unlisted assets are revalued maybe only twice per year, so their value doesn’t swing up and down like shares can. This serves to smooth out the variability of returns in portfolios which invest in unlisted assets. In addition, the long term nature of these investments matches the long term investment horizon of a superannuation fund.

In this article, we’ll delve into the realm of unlisted investments, comparing them to listed investments in terms of liquidity, returns and risk. We will explore three key areas: infrastructure, private equity and property, and provide real-world examples to illustrate these concepts.

Infrastructure Investments

Infrastructure investments involve allocating capital towards essential public services like transport, energy and utilities. Examples of unlisted infrastructure investments include toll roads, airports and power plants.

Unlisted infrastructure investments generally exhibit lower liquidity compared to their listed counterparts. These investments are not readily tradeable on public exchanges, and investors often have to commit their capital for an extended period. For instance, investing in a toll road project may require a lock-in period of up to twenty years before an exit can be realised, unless a willing buyer can be found.

These investments can offer attractive risk-adjusted returns. They often provide stable cash flows through long-term contracts and regulated pricing mechanisms. Since many infrastructure projects are monopolies, governments often regulate the prices they can charge and the returns that can be made. This makes them attractive to long-term investors. For example, investing in a renewable energy project can yield consistent returns through power purchase agreements and regulated returns. Additionally, infrastructure investments have the potential for capital appreciation over time, driven by increasing demand and potential asset enhancements.

Infrastructure investments carry their own set of risks, including regulatory changes, project delays and construction risks. For instance, changes in government policies or regulations can affect the profitability of a toll road or utility project. Investors conduct extensive due diligence to assess the stability of the regulatory framework before committing to an unlisted infrastructure investment.

Property Investments

Property investments involve acquiring real estate assets, such as residential, commercial or industrial properties. Unlisted property investments can include direct ownership of properties or investments in private real estate funds.

When compared to listed real estate investment trusts (REITs) or publicly traded real estate companies unlisted property investments are generally less liquid. While listed real estate investments can be bought or sold on stock exchanges, unlisted property investments often require longer holding periods and may involve finding suitable buyers or engaging in private transactions.

Property investments can provide investors with both rental income and the potential for capital appreciation. For example, investing in a commercial property can generate stable rental income, while the property’s value appreciates over time. Unlisted property investments also offer the potential for active management and value-add strategies to enhance returns.

Investments in property carry their own set of risks, including market fluctuations, changes in interest rates, regulatory changes and property-specific risks such as maintenance and occupancy issues. For instance, investing in a residential property may be affected by changes in local housing demand or rental market conditions. Investors conduct thorough market research, due diligence, and risk analysis to mitigate these risks.

Private Equity Investments

Private equity investments involve acquiring ownership stakes in non-publicly traded companies or buying a listed company and taking it private. In Australia in recent years both Myer and David Jones have been acquired in this way. This asset class includes venture capital, growth equity and leveraged buyouts. Real-world examples of private equity investments can include investments in technology startups, healthcare companies, or established businesses seeking growth capital.

Private equity investments are highly illiquid compared to listed investments. Investors typically commit their capital for a long duration, ranging from five to ten years. Exiting a private equity investment can be challenging, as it often requires finding suitable buyers or engaging in secondary market transactions. In other instances a private company may be sold publicly and its share re-listed on an exchange.

Due in part to their illiquidity, private equity investments can generate substantial returns for investors. Investing in a promising technology startup, for example, can yield exponential returns if the company successfully scales and eventually goes public or is acquired. Private equity investments provide opportunities for value creation through active management and operational improvements.

Private equity investments carry higher risks compared to listed investments. They are subject to business-specific risks, such as operational challenges, market competition and changes in industry dynamics. For example, investing in a startup carries the risk of market acceptance, scalability, and potential failure. It is crucial for investors to carefully evaluate the track record and expertise of the private equity fund managers to mitigate these risks.

Unlisted investments, including infrastructure, private equity, and property, provide alternative avenues for diversification and potentially higher returns. While these investments may exhibit lower liquidity compared to listed investments, they can offer attractive risk-adjusted returns and the potential for capital appreciation. Investors such as superannuation funds, due to their long-term investment timeframe and deep pockets utilise these types of investments to enhance returns and lower their risk through diversification. However, it is crucial for these funds to evaluate carefully the associated risks, conduct thorough due diligence and consider their overall portfolio. By striking the right balance between listed and unlisted investments, investors can create a well-diversified portfolio that maximises returns while effectively managing risk.