Published on ‘Investor Daily’ – 18 November 2024 by Oksana Patron
ASIC’s proposed review of private market transactions could dampen investor sentiment, leading to reduced trust and a slowdown in deal activity within the sector.
Earlier this year, the corporate regulator announced a heightened focus on capital market structural changes, including a review of “other products and markets” like debt markets, along with increased oversight of private markets as part of its expanded strategic priorities.
The move follows a recent decline in listed companies and the significant growth of private equity funds in Australia, which have nearly tripled in size since 2010 to approximately $66 billion in assets under management at the end of June last year.
Speaking on Thursday at the ASIC Annual Forum, the regulator’s chair Joe Longo said the lack of transparency in private markets, including private credit, is cause for concern.
“Regulators like us and prudential regulators worry that if something goes wrong in the private credit sphere, we won’t see it coming and it will have a contagion effect,” Longo said.
“We need to know what is going on from a capital raising and efficiency point of view and I am certainly interested in any regulatory impediments that are within ASIC’s power to change the levers to encourage more efficient capital raising.”
However, according to a platform provider, applying public market-level oversight to private markets to address risks could have significant implications for private market participants.
PrimaryMarkets’ executive chairman, Jamie Green, noted that private markets “by their very nature thrive on confidentiality and strategic control over transactions”, and an increased scrutiny of the sector may lead to “more conservative investment behaviour and a change in investor sentiment”.
“When ASIC steps in to review private market transactions, it can disrupt the trust and discretion that usually characterises these markets,” Green said.
“Investors may become more cautious about engaging in private market deals, particularly in sectors or industries where regulatory intervention is more likely.”
Such a change in investor sentiment could translate into a slowdown in deal-making activity, impacting market liquidity and valuations, he added.
Moreover, according to Green, the greater regulatory scrutiny of private transactions could also affect public markets, particularly if the Australian Securities and Investments Commission (ASIC) investigates high-profile transactions, which can “cast a shadow over related public companies or sectors.
“For instance, if an organisation is under investigation for its handling of a particular deal, investors in publicly listed companies in which that organisation has a stake or which are in similar sectors, might reassess their exposure, resulting in share price volatility in those stocks,” Green said.
While the intention of the enhanced oversight is to protect investors and promote transparency, Green warned that the short-term impact of ASIC’s review, expected to take at least two years, could result in “increased uncertainty, reduced market confidence and potential disruptions to deal-making activity”.
“In the long term, the review could lead to structural changes in private market operations, with increased costs and regulatory burdens affecting both investors and companies,” he said.
When ASIC announced its increased focus on the private markets sector, one of its key concerns was the lack of oversight in financial reporting, disclosure and corporate governance, along with the sector’s limited transparency.
This, it warned, could reduce “equitable participation” and heighten the risk of insider trading, given the numerous touchpoints between listed entities, consultants and experts.
Green, however, opined that given private market participants are institutions, private equity firms, large super funds and wholesale investors, he is not convinced that the current private market participants are in need of enhanced oversight or protection.
“If you want to admit retail investors into the private markets then you do need to fundamentally review and then construct a regulatory framework that accommodates retail investors and their very real need for enhanced protection and oversight,” he told InvestorDaily.
“It depends on whether the review concludes that it wants to broaden out the participants in private markets to include retail investors. If the review recommends doing this then significant structural changes would be necessary.
“However, if this is not the case, then the need for fundamental structural change is not readily apparent.”
ASIC chair Joe Longo has previously argued that the shift towards private markets has reduced a number of “large, strong-performing listed entities”, significantly limiting opportunities for many Australians and smaller investors to directly participate in their future success.
With around $55 billion erased from Australia’s listed markets last year, the chair raised concerns about the shrinking diversification opportunities in public markets and the growing concentration of larger institutional investors.