Article by David Ross, courtesy of The Australian
26.02.2025
The financial regulator has warned it is flying blind with inadequate powers to oversee Australia’s growing and opaque $148.6bn in private market assets, putting investor protection at risk.
In its first major foray into the sector, the Australian Securities & Investments Commission has released a landmark report into the nation’s burgeoning private markets and shrinking public markets, making clear its areas of interest.
ASIC is at pains to stress private markets aren’t problematic, but the financial sector regulator is struggling to get insights into operations and whether there is a need for intervention.
In its report into private markets, ASIC says there are concerns around opacity of investments, conflicts of interest, valuation uncertainties, illiquidity and leverage, as well as the growing forays by retail investors into the realm.
ASIC chairman Joe Longo said getting information from private markets players had proved problematic for the regulator, noting that overseas regulators had far more powers to compel players to hand over details.
The US Securities and Exchange Commission and Monetary Authority of Singapore are among ASIC’s peers with greater power to compel the production of information.
Mr Longo said Australia may need new laws to empower ASIC in this pursuit.
“We are interested in integrity, making sure there’s high standards met in that space,” he said.
“Whether there’s a potential contagion issue between private and public, I think it’s far too early to be concerned about that.”
The regulator warns that, although not yet systemically important to Australia, “failures are on the horizon”, saying private markets, unlike public markets, are “untested by prior crises”.
Mr Longo said ASIC’s investigations into the growth of private markets raised questions around the adequacy of public markets and the Australian Securities Exchange.
ASIC’s report highlights the shrinking of the ASX, a phenomena with parallels worldwide, as many companies have gone private or withheld listing.
Almost 400 companies have exited the ASX since 2021, including many major players such as Sydney Airport, while only a further 370 have joined the boards.
Increasingly companies are looking to US markets when they choose to list, with ASIC noting its concern about the future of its public markets.
Australia now represents a thinner slice of global equities markets than 10 years ago, standing at just 1.4 per cent, down from 1.7 per cent in 2014.
This is compared to US markets, which have ballooned from 34.1 per cent of equities to 51.4 per cent in 2024.
Mr Longo said Australia clearly had some regulatory complexity that had to be addressed, and this may be cooling the appetite of investors to list companies on the ASX. “I think the ASX needs to be more proactive in this space,” Mr Longo said.
“We need to be thinking very carefully about whether regulatory settings of any kind are holding people back in participating in the public market.”
Mr Longo said ASIC had been working with the ASX to consider refining the listing pathway and listing rules.
The growing importance of private assets in Australia’s superannuation pile is also of concern to the regulator, with major players sitting atop investments in companies and unlisted assets worth billions of dollars.
Several superannuation funds have also entered the world of private credit, either writing loans directly or issuing mandates to managers.
AustralianSuper took a $US757m loss on US tech firm Plurasight last year after backing a take-private of the business with both debt and equity.
Private credit is also growing in prominence in Australia, with banks increasingly wary of funding property developments and non-banks entering the space.
ASIC commissioner Simone Constant said Australian private credit funds, thought to be worth at least $2.8bn, were increasingly facing a potential crisis, warning that “Australian investors will lose money”.
“There will be more failures in some private credit investments,” she said.
Ms Constant said the focus on private credit was not to constrain the sector but to ensure the regulator was well informed and the players complied with investment rules. “We are focusing on fund governance, valuation practices, accuracy of statements, management of conflicts of interest, and fair treatment of investors,” she said.
ASIC will provide a more detailed update on private credit later in the year.
Mr Longo said he was “quite struck” with the volume of feedback from the investment market about private credit.
“I don’t think it’s our intention to make it harder for people to access private credit,” he said.
ASIC dropped a probe into Sydney property player and private credit lender Pallas Group in 2023, despite investigators finding concerning behaviour, after the regulator said the group’s high-net-wealth backers could look after themselves.
A key issue in ASIC’s consideration of any enforcement action is the degree of retail vs. wholesale investor penetration in private markets.
ASIC Markets executive general manager Clarissa Aldridge said ASIC did not have evidence of significant issues playing out across private markets.
“I think when we look abroad … it gives a bit of an insight into some of the issues that might play out here,” she said.
“They’re guiding the focus of our surveillance work which does look at governance around valuations and how disclosure is occurring.”
Reach Alternative Investments co-founder Jonathan Ng said ASIC could look to focus on several pain points in private markets, pointing to opacity around fee and expense structures in unlisted assets as an obvious area.
He said the lack of standardisation in disclosures made it hard to understand what fees or expenses were paid.
Mr Ng said some asset managers report being asked to book fees in portfolio level companies, in a bid to make companies appear to be less costly than they truly were, to juice performance figures. “Whenever someone is given the rules, they find a way around it,” he said.
Mr Ng said he was also concerned about how big investors were able to get preferential treatment from private asset managers. “There’s side letters where they can request more information than what others get. This creates asymmetry of information,” he said.
Mr Ng also pointed to liquidity windows for unlisted assets and disclosures to investors.
He said many asset managers made claims about access for investors, which gave investors the impression “you can get out whenever you want”.
“The reality is you can’t, that’s something that should be looked at in the actual fund documents,” he said.
