Duff & Phelps questions valuation processes for less traded assets

Duff & Phelps says that managers need to consider firmer illiquid asset valuation policies, to guide them in difficult times.

Even as interest in less liquid asset classes has returned since 2008-2009, there may also be a tinge of nervousness about whether all managers are implementing ‘best practice’ in valuing the notoriously difficult-to-value illiquid classes.

Simon Greaves (pictured), managing director in the London office of Duff & Phelps, and leader of its complex asset solutions practice across Europe and Asia, says in the good, and liquid, times some managers saw less need to institute highly robust policies around valuing less liquid instruments.

But since 2008, when trading in some asset classes all but evaporated, the importance of having policies has come to the fore. Some managers were caught off guard back then by the volume of assets and the breadth of markets that became illiquid.

Greaves says Duff & Phelps has seen esoteric instruments where one might expect only limited trading. He adds: “We also see some emerging markets assets whereby they are bonds or loans issued by companies in which there is no liquidity in their underlying note issuance.

“It could be a corporate that does not issue much debt, so there is little liquidity in the debt. We see everything from structured finance and private equity through to derivative classes to bonds and loans. It runs across the asset classes and the complexity of assets. We see a lot of derivative transactions which, by their nature, are illiquid, but equally you could see EM loans or notes.”

He says managers with alternative asset allocations, parts of which are illiquid, “should be doing something over and above your own valuation of that position, and getting some independent valuation advice. There has been a move towards greater accountability and managers want to be following best practice as far as possible.

Thorny assets

“Managers’ attitude may be, because their investors are asking questions and it is critically important, they are seen to be doing the right thing [even if] a thorny asset is not material to their overall NAV.”


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