ASIC will interrogate the potential risks with private market investing for retail clients and assess whether the opportunity of democratisation to access is outweighed by the exposure to risk with fewer protections.
The regulator released its discussion paper on the dynamics between public and private markets this week which it will use to engage with the industry for feedback on how to better regulate both sectors.
“Historically, in Australia access to private markets has been limited to wholesale investors, with some minor exceptions,” the paper said.
“As a consequence, these markets have been more lightly regulated, without the same investor protections as for retail investors.”
It comes as retail and wholesale investors have begun to gain better access to private markets with HUB24 and Netwealth partnering with Reach and iCapital respectively, and BT partnering with alternative education provider Preqin.
Additionally, the paper said the current regulatory framework works under the assumption that wholesale investors are in a better position to look after their own interests, in comparison to retail investors.
“In Australia, a range of persons are classified as wholesale investors, from an individual who is identified by an Australian Financial Services (AFS) licensee as having sufficient investment experience to assess an investment offer, to a superannuation fund with an experienced professional investment team and billions of AUM [assets under management].”
ASIC expressed concern about the opacity and unfair treatment of investors, management of conflicts of interest, valuations of illiquid assets, and vulnerabilities from leverage.
The regulator was also concerned about the high fees charged by private capital funds, noting typical fee structures included 1.5 to 2.5 per cent of committed capital with performance fees upwards of 20 per cent.
“It can be challenging for investors to monitor the extent to which private capital fund managers are extracting value from their role, which underscores the importance of appropriately managing conflicts of interest and fair treatment of investors,” the paper said.
Furthermore, since fees are tied to performance, the paper said there are incentives for fund managers to provide misleading information about fund performance and noted the US Securities and Exchange Commission had identified issues with hidden fees from private equity funds.
Overall, the paper asks for feedback on 15 questions ranging from what can be done to make it more attractive for companies to list on public markets, whether the expectations on public markets are unfairly higher than for private markets, and if a shrinking listed market will have adverse impact on the overall economy.
The regulator has made scrutiny of private markets a strategic priority in its FY25 corporate plan.
ASIC chair Joe Longo told a media briefing this past Tuesday the project was not just about enforcement, but also about the future of Australia’s economic growth.
“This is the most important piece of proactive work ASIC has undertaken in my time as chair,” Longo said.
The paper estimated value of global private capital was US$14.6 trillion ($23.1 trillion) as of June 2024, increasing threefold over the past decade, with estimates that it could reach US$21 trillion by 2030.
‘Failures are on the horizon’
The paper highlighted the growing interest in private credit, particularly just in the last year, warning it might just be a bubble.
While the regulator conceded the private credit market “does not appear to be systemically important in Australia”, it believes “failures are on the horizon”. Consequently, ASIC wants more information to be able to consider the risks and plan for worst case scenarios.
“There will be more failures in private credit investments, and Australian investors will lose money,” the paper said.
“ASIC is increasing its focus on private credit, not to constrain participation but with a view to being well informed and to test whether investment offers comply with existing laws.”
The paper said it is undertaking work to examine private credit and risks for retail investors more closely, which will include thematic surveillance of retail private credit-focused funds.
This surveillance will review governance and disclosure practices, distribution, conflicts, valuation and credit risk management.
“Retail investors can face significant harm if persons operating businesses that on-lend retail investment monies fail to comply with the law, as evidenced by issues that have arisen in the past in relation to debentures and managed funds,” the paper said.
Simone Constant, the ASIC Commissioner who largely been tasked to deal with the superannuation sector, told the briefing there is too much variability and inconsistency in the asset class.
“It is a broad church…from institutional right down to raising money from retail and whether it’s individual superannuation through their SMSFs being invested through to institutional funds,” Constant said.
“We’ve been trying to be targeted in our activities and focus on where we have the areas of greatest question, and we can say there’s real variation in how current standards are being met.”
Public versus private
The paper also explores the interplay between private and public markets, with outcomes centred around whether the regulator can make public markets more attractive for companies to list or if private markets need more stringent checks and balances.
The value of ASX-listed entities has increased 91 per cent from $1.58 trillion to $3.01 trillion over a decade from 2014 to 2024.
In that same time frame, the number of listed equity issuers has decreased 4 per cent from 1989 to 2073 and the value of equity raised in initial public offerings has decreased from $22.9 billion to $4.2 billion.
However, over the decade, the collective private capital fund AUM in Australia has increased 161 per cent from $57.1 billion to $148 billion.
This includes a 131 per cent increase for private equity (from $28.5 billion to $65.9 billion); 240 per cent increase for private credit (from $0.6 billion to $2.8 billion); and 189 per cent increase of private real estate, infrastructure and resources AUM from $27.7 billion to $80 billion.
“Over the past two decades, the number of public companies on major developed public equity markets around the world has decreased,” the paper said.
“In the United States, this decline started in the late 1990s, while in Europe and the United Kingdom, the global financial crisis in 2008 marked a key turning point. This trend is largely driven by fewer companies going public to replenish delistings.”
