In its latest corporate plan, the Australian Securities and Investments Commission (ASIC) has announced it will prioritise reviewing the growth of Australia’s “opaque” private markets, with chair Joe Longo highlighting the heightened risk to market integrity as investor exposure increases.
“While Australia’s private markets are dwarfed in size by our listed equity markets, their opacity presents an outsized risk to market integrity, particularly as more investors become exposed,” the ASIC chair said on Thursday.
On an InvestorDaily webcast, Andrew McVeigh, managing partner at Remara, endorsed increased transparency and standardised reporting as “fantastic” for the industry, noting it would help differentiate between effective and ineffective managers.
“It’s a great thing to have more transparency… The major topic for us at the moment is what are your arrears, where are your fees and what do you get paid that you don’t disclose through your PDS, et cetera, et cetera. So I think it’s certainly the topic of the day,” McVeigh said at the webcast exploring the rise of Australian commercial real estate debt (CRED).
“I think the ability to be able to weed out good managers versus bad managers, a level of transparency and standardised reporting, would be fantastic for the industry and probably be very beneficial for most investors. So, our house view is we’re well supportive of ASIC and their endeavour to show some transparency in the industry.”
Joining McVeigh on the webcast, Tom Cranfield, director of investment and risk at Zagga, emphasised that despite some vocal critics, the sector’s rigorous compliance measures are likely to lead the regulator to a positive assessment of its standards.
“We have external auditors that are quarterly auditing every one of our funds, that are auditing our book. We have external credit and investment committees with oversight from parties not in the business. We have regulation from our AFSL that allows us to write a 30-year bank grade mortgage if we want to. So, APRA already has done a deep dive across us,” Cranfield said.
“We use independent consultants to oversee our loans. We’ve got quantity surveyors; we’ve got third-party valuers. In our IM’s for investors, they disclosed exactly how we make our fees. In our deal-specific IMs, they see exactly what the pass-through is between the loan manager and what the borrower gets to the investor and what they receive.
“I think at times, maybe people with a louder voice come out and talk their own book against what’s the new burgeoning place. If you look at the rigmarole with which we operate and the rigorous nature of the compliance measures which we all undertake, I think we’ll be completely fine. And I think if the regulator comes in, they’ll come to the same conclusion.”
The scrutiny of private markets has increased, with both ASIC and the International Monetary Fund (IMF) raising concerns about their growth. The IMF cautioned in its April 2024 Global Financial Stability Report of potential vulnerabilities that could stem from limited oversight of private credit, which it referred to as an “opaque and highly interconnected” segment of the financial system.
Similarly, last month, Longo said: “We need to understand better what’s going on there because the very nature of private markets is a lack of transparency and data”.
Excessive regulation a hindrance
Also speaking on the webcast, Nick Raphaely, co-founder and co-CEO of AltX, supported sensible regulation as a means to elevate industry standards and differentiate businesses, while acknowledging that excessive regulation, prevalent in Australia, can be burdensome.
“We encourage regulation, obviously, to a sensible, not extreme level, because I think the smaller players are not resourced to handle it. So, I think it becomes a point of differentiation. And I also think that kind of sensibly applied and interpreted it, it forces you to raise the standard of your business,” Raphaely said.
“Like we report to APRA every month, similar to the guys, we do an AUSTRAC report every year … obviously ASIC’s there too … And so like, it forces us to operate a certain level, but also becomes a point of differentiation.”
Raphaely added that regulation can help validate the efforts of established, compliant businesses.
“I sometimes say, a bit flippantly, that in certain products that we offer, if you have a little bit of capital, a set of loan documents from your brother-in-law and some ambition, you’re a competitor of ours. And we’ve been going for a decade gutting away with like 60 people. So, kind of, that feels a bit unfair,” he said.
“If everyone has to operate a certain standard, then hopefully you get to distinguish yourself and the business that I guess you’ve worked hard to try and establish.”
Earlier this month, a global survey revealed that private credit is gaining popularity among institutional investors, with sovereign wealth funds particularly capitalising on new lending opportunities.
Also this month, an analysis of capital commitment plans into alternatives over the next 12 months revealed private credit as the favourite among investors globally, with around half of investors noting they intend to increase their allocations to the asset class.
The private credit market stood at around $188 billion in Australia last year, according to recent projections from EY.
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