ASIC chair Joe Longo said feedback to the regulator’s recent paper on capital markets confirmed it was "asking the right questions" about the risks and regulation of private markets, while also revealing that the regulator had "underestimated the complexity and depth" of the space.
"A lot of the submissions were self-interested, but that’s to be expected in a liberal capital economy," Longo said at ASIC’s symposium on Tuesday night. "It’s a collective self-interest that hopefully leads to the public interest."
The submissions to ASIC’s paper on capital markets, which included input from fund managers, advisers and superannuation funds, also offered "actionable ideas", he said, as ASIC signals further scrutiny of valuation practices and liquidity in the private markets sector.
The symposium and the regulator's focus on capital markets more broadly come as Australian super funds, backed by strong inflows, have ramped up exposure to private assets – including infrastructure and private credit – prompting concerns about how these holdings will behave in periods of stress.
Elaborating on feedback received by the regulator, Simone Constant, ASIC commissioner, said on Tuesday evening she was surprised by how many private credit participants, in particular, called for "if not regulation, more transparency in the private credit space".
"Some of that was geared toward end investor. Some of that was geared toward protection or awareness and transparency to borrower. But some of that absolutely was geared toward, you need to really confront how significant this is. It may not be a problem, but you need to know the size of this wall in case it becomes one," she said.
Also speaking at the event, Guy Fowler, co-executive chairman of Barrenjoey Capital Partners, warned that the surge in private asset allocations may shift when liquidity pressures emerge.
"I am old enough to remember when every private real estate asset was held in unlisted vehicles, and then we had a liquidity crunch in the ’90s, and they all became REITs. It probably goes in cycles," he said.
"At the moment, there are large amounts of private assets in super funds, because they’re still in a heavy inflow environment. When they start to go to outflow, and it maybe 10 years, 15 years, and there’s a liquidity crunch, a liquidity premium will come back."
"The real question", Fowler noted, "is why capital is flowing into private markets when, in theory, the same asset should attract a lower cost of capital and be better suited to the liquidity of public markets".
"It’s because some of the constraints that live in the public markets don’t exist there. Whether it’s a longer-term view around returns, whether it’s different alignments for managements, whether it’s different capital structures. We’re not quite apples and apples, and that’s why I think the money is – it’s not apples and apples," he added.
Peter Warne, non-executive director at UniSuper, echoed concerns about transparency and liquidity, noting that over 80 per cent of UniSuper’s portfolio remains in listed markets.
"We need it, A for liquidity, and B for a price-setting mechanism that we have confidence in," Warne said at the symposium. "That is absolutely required."
Touching on the concerning shrinkage of Australia’s public markets – another key focus of ASIC’s paper – Warne acknowledged their slower growth but emphasised their enduring importance as a foundation for long-term investment management.
"They’re still, I’d say, in good shape. But they are not growing as fast as we would like to see them grow," he said.
ASIC's regulatory rethink comes as global investors, increasingly uneasy about their exposure to the US – which accounts for over 60 per cent of listed market capitalisation and even more in private markets – look to diversify.
Australia, Longo said, is well-positioned to benefit if it continues to demonstrate stability and rule of law.
"Australia is seen as a sophisticated market, with strong rule of law and institutions. We have stability in all of those areas," Longo said.
"BlackRock and Apollo are very interested in what we’re doing. If we play our cards right, we have a real opportunity to develop both our public and private markets in a way that attracts global capital."
'We would pick public every day of the week'
For Future Fund's CEO Dr Raphael Arndt, while public markets remain a preference for cost, transparency and flexibility, the fund has significant private market exposure not due to lighter regulation but due to broader market dynamics.
"If we could get the same asset in public or private markets, we would pick public every day of the week," Arndt said at the symposium.
He pushed back on the idea that regulation is driving capital into private markets, instead pointing to the longer time horizons required by growth companies.
"I think it’s really about the time horizon of the end investors in both markets. And the public markets aren’t particularly good places to fund a growth company that has to reinvest in its own business, or acquire businesses to turn around or fix something that’s broken and be patient. The irony, I think, is – and that’s how you create a lot of value as an investor, and that’s why we would expect higher returns in private markets," he said.
The growing mismatch between the long-term nature of private assets and the daily liquidity offered by super funds also raised red flags on Tuesday, with professor Carole Comerton-Forde of the University of Melbourne noting that the current valuation regime risks creating winners and losers among fund members.
"Super funds rightly should be going into private markets and going into private assets, because they have a long term horizon. But super funds are also required to provide daily liquidity for their members. And so if you’re providing daily liquidity, but assets are only getting revalued every quarter, and APRA has suggested there’s some issues around valuation of assets, there’s going to be winners and losers amongst the members of the superannuation funds, and I think that’s something to think about," she said.
Comerton-Forde highlighted that in a purely institutional private market, where institutions commit capital for the life of a fund, valuation challenges are less of a concern, unlike in structures with frequent inflows and outflows, where member turnover can distort outcomes.
Ultimately, she said: "We need to have more transparency around the valuation process".
For his part, Longo on Tuesday evening signalled a readiness to explore further reforms – having earlier in the day announced a two-year trial aimed at shaving up to a week off the IPO timetable – with the chair confirming the regulator remains "open to good ideas and change within our remit".
"I think where the regulation plays a real role is in facilitating healthy and efficient markets," Longo said.
For him, a key takeaway from the symposium was the assumption of transparency in private markets, prompting him to caution that forming strong views on returns assumes clear visibility into private market performance, valuation practices, risk premiums, and who’s actually investing.
"I think the direction of travel for us at the moment is I think we’re particularly interested in that topic of transparency and data. So far as regulation in general is concerned, we have an entirely open mind about where that goes."
