The Australian Securities and Investments Commission (ASIC) has recently announced that it intends to review private market transactions in light of, among other things, recent large transactions in the private market (eg $20B AirTrunk sale). The expected time frame for this private markets review is at least 2 years. The potential impact of this review has wide ramifications in markets more generally and its impact could be multifaceted, affecting both the companies involved in transactions and the broader financial ecosystem.
At its core, ASIC is tasked with monitoring and promoting market integrity and consumer and investor protection in the context of enforcing and giving effect to existing laws. An investigation into private market transactions should therefore typically focus on uncovering misconduct, fraudulent activity, insider trading, or breaches of fiduciary duties. One aspect of ASIC’s review will cover how the execution of private market transactions compares to the rules and integrity applicable to public market transactions. The potential influence and outcomes of this review extend beyond individual transactions and companies, potentially fundamentally reshaping private market dynamics.
Private markets, by nature, thrive on confidentiality and strategic control over transactions. These markets include private equity, venture capital and other forms of investment that do not involve publicly listed securities. The range of participants in the private markets has been steadily expanding in recent years to now include family offices, corporates, mainstream institutional investors and industry superannuation funds.
When ASIC steps in to review private market transactions it can disrupt the trust and discretion that usually characterises these markets. For companies, transactions or market participants under review, the immediate consequence is the exposure to heightened scrutiny, potential reputational damage and potential financial losses. Even if no wrongdoing is found, the mere fact that a regulatory body is examining a person’s activities can be enormously distracting for management, costly (eg lawyers and advisors) and lead to uncertainty among investors, partners and customers. This uncertainty could affect future fundraising efforts, complicate business and stakeholder relationships and diminish confidence in management.
For the market as a whole, ASIC’s involvement in private market transactions may signal a shift towards increased regulatory oversight which could change the risk profile for investors. While enhanced oversight is intended to protect investors and promote transparency and fair dealings, it can also lead to more conservative investment behaviour and a change in investor sentiment. Investors may become more cautious about engaging in private market deals, particularly in sectors or industries where regulatory intervention is more likely. This can lead to a slowdown in deal-making activity, affecting market liquidity and valuation.
When private market transactions are under ASIC investigation, it inevitably raises concerns about governance, transparency and transaction execution risk. This may lead to an increase in the cost of capital or revaluation of assets, particularly in cases where regulatory probes highlight systemic issues in certain industries or sectors. Additionally, the focus on disclosure could lead to tighter deal structures and more extensive due diligence, reducing the flexibility that private markets typically offer.
There is also a potential ripple effect on public markets. When ASIC investigates high-profile private transactions, it can cast a shadow over related public companies or sectors. For instance, if a private equity firm is under investigation for its handling of a particular deal, publicly listed companies in which the firm has a stake or which are in similar sectors might experience volatility as investors reassess their exposure.
From a legal and compliance perspective, ASIC’s review might result in a new regulatory framework and accompanying regulations or more stringent enforcement of existing rules governing private market transactions. This could prompt a structural shift in how private markets operate, with increased formalization and transparency. While this may reduce the risk of fraudulent behaviour and enhance market integrity, it could also reduce the flexibility and speed that private markets offer. The long-term effects could include a rebalancing of power between private and public markets.
ASIC’s investigation of private market transactions could introduce significant changes to the market landscape. While the intent is to ensure fairness and protect investors, the short-term impact includes increased uncertainty, reduced market confidence and potential disruptions to deal-making activity. In the long term, this review may lead to structural changes in private market operations, with increased costs and regulatory burdens affecting both investors and companies. The challenge for private markets will be to adapt to an evolving regulatory environment while maintaining their appeal as a flexible and high-growth segment of the financial system.
Use of Confidential Information
The use of confidential information disclosed to bidders by sellers during a sale process has given rise to ASIC concerns about market integrity and fairness. The potential misuse of such information in a public markets context, often referred to as insider or price sensitive information, has the potential to have a material effect on the perception and valuations of listed companies involved in similar industries or sectors, as well as the overall dynamics of the market.
For example, sensitive financial or strategic data, such as pricing strategies, growth plans, or intellectual property, can give buyers insights into similar companies whose shares trade on a public market. These confidential non-public insights which are based on non-public, confidential information have the potential to give the recipients an unfair advantage and may, it is argued, amount to insider trading. Bidders who have this kind of information and insight can leverage this knowledge to their financial advantage.
There is also the issue of how unfair advantages can distort market competition. Companies that gain access to confidential information may enjoy a competitive edge that their rivals cannot match. This undermines the fairness of the competitive process, giving some companies an advantage that is not based on superior business practices or market acumen. This can distort market prices, as the unfairly advantaged company might make investment decisions based on inside knowledge, not true market conditions.
The long-term consequence of these practices is a potential recalibration of how private market transactions are conducted. Companies that are found to have benefited from improper access to confidential information may face legal penalties or market sanctions.
How bidders and sellers use confidential information obtained during a sale or bid process has significant implications for the conduct of private market transactions and overall market fairness. The announced ASIC review is bound to look closely at this issue and its findings and any proposed regulatory framework or regulations will be eagerly awaited and closely examined.
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