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26 September 2023

Putting a fair price on our private market investments

At 31 March 2023, around a third of our Retirement Income Builder investments, those in the defined benefit part of the scheme, were in private markets. These investments include assets like private infrastructure, private equity, private credit and property.

Our private market assets are managed by our dedicated in-house team at USS Investment Management (USSIM). The majority are held directly, which means we invest directly in the company rather than through an external manager. The remaining investments are held indirectly, through funds and co-investments, that our in-house team are responsible for selecting and overseeing.

Our direct investments are in sectors that include regulated utilities and transport infrastructure, with many of our investments in household names.

These types of investments are attractive to pension schemes like USS because they tend to provide the kind of long-term, inflation-linked returns needed to pay the benefits promised to members.

They act to diversify the scheme’s assets and have historically performed well in a variety of market conditions. While public and private valuations are to some extent correlated, private asset valuations tend not to exhibit the high levels of short-term volatility that are sometimes seen in the trading and pricing of publicly listed assets. Private market valuations exhibit fewer peaks and troughs compared to the stock market; they tend to be a bit steadier.

In terms of accounting, our directly held private equities, private credit, and property assets are stated at ‘fair value’ (that is, the price of an arm’s length transaction between knowledgeable, willing parties).

Unlike publicly listed assets, where values are obtained from quoted traded prices, private assets are valued by experts using a range of different data points and techniques to form a view of fair value. Our valuations use valuation techniques appropriate to the assets in question, for example, discounted cash flow models and other market data cross checks for our infrastructure assets.

Our directly held private assets are valued either by an experienced internal team of valuation specialists or by independent external valuation experts (either Big 4 accounting firms or a property valuation expert). Valuations of private assets are updated monthly so as to provide members with fair pricing of the Investment Builder, the defined contribution portion of the scheme, which holds an allocation of such assets.

Our Fair Value Committee (FVC) is responsible for reviewing, challenging and approving the direct asset valuations including valuation policies, processes and their application to individual investments. The FVC is overseen by the Group Audit and Risk Committee (a sub-committee of the USS Board – for further information please refer to the latest Governance report).

All members of the FVC are independent from the investment teams with one member being an externally appointed independent valuation expert. They are all assessed against a competency matrix prior to appointment to ensure they have sufficient relevant experience – and their compensation is not impacted by the scheme’s investment performance.

Our investments in private equity and private credit funds (also called pooled investment vehicles) are stated at values advised by the fund administrator based on the fair value of the underlying assets in accordance with International Private Equity and Venture Capital (IPEV) valuation guidelines.

The scheme’s financial statements are the subject of an annual external audit which aims to provide assurance that the net assets of the scheme are fairly stated. For the directly held private assets, a specialist team of our auditor’s valuers reviews the valuations in detail as part of the audit process.

We are always working to improve our valuation processes and recently took part in a global pension fund valuation benchmarking survey. The results of this survey have helped us to gauge how our valuation procedures compare to our peers and have also provided confidence that our approach to valuations is aligned to industry practice.

The underwriting of new investments and the negotiation and agreement of price is the primary responsibility of the private markets investment team subject to transactions receiving appropriate review and approval. Once assets have been acquired, the private market asset valuation framework is managed as set we’ve out above.

As trustee, we believe our members can have confidence that our approach to the valuation of private market investments is robust and that the value we place on our private market assets is fair.