What It Means for Participants and Investors
ASIC is now paying close attention to the Australian private markets, emphasising the need for greater transparency, investor protections and potentially increased regulatory oversight. With the rapid growth in private market transactions involving a variety of market participants, regulators are keen to ensure that these private markets operate with trust and integrity in the best interests of all stakeholders, including investors and market participants.
Background
Broadly speaking, private markets encompass the following asset classes, private companies, private equity, private credit, infrastructure and property. Consistent with global trends, Australian private markets have seen an enormous surge of investor interest, from both domestic and international players. While private market assets offer a range of potentially attractive investment characteristics, it is fair to say that they are far from risk free. While they share many risk factors in common with their publicly listed counterparts, they also exhibit a number of unique risks associated with a lack of liquidity and therefore limited price discovery, a lighter touch regulatory framework and a lack of transparency.
Public & Private Markets
The inter-relationship, if any, between the public and private markets is attracting ASIC attention in an effort to understand and explain the decline in IPO’s (compared to the vibrant raising of follow-on capital by listed companies) and whether this is linked to the growth in private markets.
The availability of deep pools of patient private capital has undoubtedly contributed to the decline in the number of larger IPOs and the increased activity of large local and international private equity funds has exacerbated the “take private” trend.
It is worth reflecting on the fact that, traditionally, the ASX was the natural home for the more speculative small resource and tech companies which provided a regular and reliable source of new IPOs. Given the growth of available private capital, coupled with all the formalities, costs and compliance as well as anecdotal evidence suggesting that the ASX is a somewhat difficult environment for micro caps to list and operate, it is not surprising that the number of IPO’s has fallen as these smaller companies elect not to list.
The key reasons for a company to undertake an IPO are to raise capital and provide liquidity. However, listed micro-cap companies too often find themselves stuck in a position where there is no liquidity in their shares, with large bid/ ask spreads and occasional trading at a fraction of a cent. In these circumstances, any capital raising is at such a low share price that it is prohibitively dilutive for existing shareholders. For example, out of approximately 2,230 ASX listed companies, approximately 275 companies have a share price of less than one cent and 467 have a share price between one cent and five cents. Further, approximately 253 of companies have a market cap of less than A$5m and 269 have a market cap of between A$5m and A$10M. It is not surprising, therefore, to see the voluntary delisting of Microcap from the ASX.
ASIC Concerns
The sheer weight of money, from both local and global sources, now flowing into Australian private market assets including infrastructure and private credit by large superannuation funds, private equity, institutions and family offices, coupled with a marked, arguably systemic, contraction in new public market listings and the continued delisting of both small and large cap companies (voluntary de-listings or corporate takeover activity) has resulted in the current focus by ASIC.
In an increasingly concentrated superannuation sector, the dollar value of the superannuation industry is now such that the deployment of their capital, as mega investors, directly into private markets has the potential to fundamentally influence, if not drive more broadly, the Australian capital markets. Where superannuation funds, who are custodians of a large proportion of retail investors’ savings, directly deploy capital into large private market transactions, ASIC has identified concerns about leverage, valuation opacity and the flow on effects on unit pricing and of any potential default.
ASIC’s concerns over valuation transparency and process, especially when retail investors are exposed via superannuation funds, have raised a number of issues which will require careful regulatory consideration. The potential for conflicted conduct where management fees and remuneration have the potential to drive increasing valuations poses a dilemma for regulators and market participants alike. The role of and processes employed by, financial intermediaries who often carry out the valuations are likely to come under increased scrutiny, especially given the implications of periodic “mark to market” practices.
Implications
ASIC observations signal a push towards ensuring that investors in private markets are better informed and protected, especially in an environment where liquidity and valuations can be less predictable and less transparent than in the more liquid and more stringently regulated public markets. While retail investors do not ordinarily have direct access to the private markets (private markets are typically restricted to wholesale and sophisticated investors), there is an increasing number and range of investment vehicles through which retail investors can seek exposure to private markets assets.
Of particular concern to ASIC are the risks retail investors face arising out of misaligned incentives and potential conflicts of interest on the part of the trustees and managers of these investment vehicles and superannuation funds. Inflated fees and expenses, misleading performance information and inappropriate valuations are examples of areas that ASIC is likely to review.
With the rise of secondary share trading, the need for market integrity, good governance, security, transparency and fair dealing is more critical than ever. Platforms such as PrimaryMarkets, whose systems and processes are transparent and robust, facilitate the orderly execution of private share and unit trading transactions in a trusted, safe and secure environment. The need to foster trust and efficiency in all aspects of the private markets is essential if the Australian private capital market is to participate fully in the global financial system and continue to attract offshore capital inflows.
Greater regulatory oversight appears likely as ASIC refines its stance on private markets. It is reasonable to assume that ASIC will carefully review the various participants and component parts of the private markets with a view to determining if the level and degree of supervision and regulation is fit for purpose to support efficiency and confidence in private markets.
At PrimaryMarkets, we welcome a well-regulated, well-structured private market ecosystem. Compliance and proper processes are not a burden—rather they present an opportunity to strengthen trust, attract institutional capital and drive sustainable growth in the private market sector.
The PrimaryMarkets Platform has evolved to meet the market demand for facilitated capital raisings, liquidity and secondary trading of securities (shares and units) in private companies and Funds. By providing a transparent platform for liquidity we help with the price discovery and valuation process. ASIC’s scrutiny reinforces the importance of operating within a trusted, compliant and institutional grade framework.
As private markets evolve, ASIC’s focus serves as a reminder that only those platforms such as PrimaryMarkets which are built on strong governance, transparency and investor protections will thrive.