WHAT ARE YOUR NON-TRADED SHARES WORTH? HOW TO DISTINGUISH PRICE FROM VALUE

What is NAV?

In a world without liquidity, where Net Asset Value and price are often used interchangeably, it can be hard to tell. 

When estimating the value of your non-traded portfolio, it is important to consider how a fund’s strategy, structures, and management team can positively or negatively affect your investment.

Busy advisors and shareholders will benefit from keeping the following concept in mind: “Price” is the amount at which an asset can be bought or sold. Price, which is objective, can be higher or lower than “value” which is subjective.

This distinction, while seemingly elementary, encapsulates shareholders’ most important question: “how reliable is the value on my statement?” 

Validate the stated value

The key to underwriting the stated value of an asset is knowing where to look.

For debt portfolios, look for underperforming assets

The most subjective component of debt-focused portfolios, such as those found in non-traded BDCs and mortgage REITs, are underperforming asset prices. The value of a loan that is in default reflects a Manager’s opinion on how impaired the asset is, which naturally varies from manager to manager.

For example, in Q3 2020 CION Investment Corp., a non-traded BDC, and Investcorp Credit Management, a traded BDC, both held Premiere Global Services Inc.’s second lien debt at different valuations in their two most recent quarterly filings. 

Liquidity

Description

Q3 2020

Q4 2020

Non-Traded

CION Investment Corp.

52%

68%

Traded (ICMB)

Investcorp Credit Mgmt. BDC Inc

42%

35%

From the pricing differences, one can assume that CION’s outlook on Premiere Global Services has become more favorable while Investcorp’s has become less favorable.

The good news for investors is that most non-traded debt portfolios are diversified enough that valuation differences for any single asset do not cause large NAV swings. Instead of focusing on any individual security, we recommend looking for portfolio level trends.

Red flags can include a manager consistently:

  • Marking underperforming assets down after other managers have already done so
  • Valuing assets above where other funds have marked the same asset

For equity portfolios, look for stale assumptions

The most common equity-focused portfolios in the non-traded industry are equity REITs. Equity REITs own and manage property which can make valuing them increasingly complex.

The complexity of the valuation process causes equity REITs to provide infrequent updates to the net updated estimates. This can be a risk for investors especially when market conditions change drastically.  

To validate potentially stale net asset value estimates, investors should use an updated capitalization rate (“cap rate”) and the REIT’s most recent financial filings.

[For a deep dive/case study on this click here]

USE MARKET COMPS TO ESTIMATE PRICES

The comparables approach is, in our opinion, the most effective way to anticipate where the market will price newly listed securities.

In some cases, identifying a comparable product is simple. This was true for the FS KKR Capital Corp. II listing. The significant overlap between the FS KKR Capital Corp. (NYSE: FSK) and FS KKR Capital Corp. II (NYSE: FSKR) portfolios indicated that FSK and FSKR were likely to trade together after listing. 

Source: EDGAR, FSKR 8-K 6/3/2020
Source: Yahoo Finance

For non-traded products without direct market comps, such as Sila Realty Trust, it is helpful to create a composite based on the products exposure. In the case of Sila, a 40/60 weighted composite that includes a Data Center REIT and a Healthcare REIT would likely approximate Sila’s trading price under current market conditions.

Industry

Total Number of Leases

Leased SF

2020 Rental Revenue 

Percentage of 2020 Rental Revenue

Data Centers

66

3,179,954

$110,755

40.1%

Healthcare

139

4,989,948

$165,781

59.9%

Total

205

8,169,902

$276,536

100.0%

Source: EDGAR, Sila Realty Trust 10-K

To ensure an apples-to-apples comparison, investors should calculate NAV estimates for their market comps as well.

CEF Advisors and Nareit are helpful resources for identifying market comps.

Bringing it together

So where are the land mines? Management. 

Management decisions can make a good portfolio bad and a bad portfolio worse and they are difficult to estimate with imperfect market comps. In future articles we will discuss how management decisions before, during, and after liquidity events can erode shareholder value. 

We are here to help

Do you need help valuing a specific security or a portfolio of non-traded assets? Contact us at [email protected] and we will help you determine what your shares are worth and how to sell them at the highest price.

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