ASIC concerned about growth of opaque private credit markets, calls for feedback

The country’s top financial regulator, the Australian Securities and Investments Commission (ASIC), is increasingly concerned about the growth of opaque private credit markets and is calling for feedback from market participants to ensure it does not develop into a systemic risk.

New research from ASIC shows that investments in private capital funds are growing one and a half times faster than those in listed equities on the more heavily regulated Australian Securities Exchange (ASX).

The preference for private markets comes as the number of initial public offerings (IPOs) has fallen to the lowest level in over a decade.

At almost $150 billion, the private capital market remains a fraction of the $3 trillion invested in the ASX, but ASIC Chairman Joe Longo said key risks are emerging, including a lack of transparency, valuation uncertainty, conflicts of interest, and the use of leverage.

Globally, private markets have grown threefold, reaching $US14.6 trillion over the past decade. In response to this trend, ASIC’s report stated that regulators need robust data to identify and respond to risks.

Private capital markets include private equity funds, infrastructure, and private real estate funds, as well as the fastest-growing sector – private credit – which has more than tripled in size in the last ten years, reaching a historically high $2.8 billion.

The research paper found that private debt funds often invested alongside private equity and leveraged loans, and are subject to less regulatory oversight.

“We are… concerned about the private credit market. While it does not appear to be systemically important in Australia, failures are on the horizon, and at current volumes it is untested by prior crises,” Mr Longo said.

ASIC said that the paucity of IPOs meant the Australian market was becoming concentrated, dominated by companies in the financial and mining sectors. The lack of diversity means Australia is “less represented in sectors that will drive growth in our increasingly digital future.”

ASIC’s research pointed to the low level of IPOs in New Zealand “over many years” and said the “weak domestic capital market activity has amplified the productivity and economic growth challenges in New Zealand.”

The absence of new IPOs in Australia means the $4 trillion superannuation sector is increasingly turning to private markets both here and abroad to deploy members’ funds.

According to ASIC, major superannuation funds are investing 20 per cent or more of their assets in private markets, much of which is offshore.

“The presence of superannuation in this story means that every working Australian is impacted by the evolution of Australia’s capital markets,” ASIC Commissioner Simone Constant said.

The presence of Australian capital in foreign markets was also a concern, as a private market event might result in market contagion impacting other assets.

“We haven’t yet seen the global economy in a crisis or stress event respond when there is this much private capital,” Ms Constant said.

ASIC intends to use the research to spark a process of consultation with the finance industry on collecting data for monitoring private markets.

The report found, for instance, that funds such as managed investment schemes do not have standardised disclosures, while audited financial reports are neither timely nor granular.

It found unregistered wholesale funds are not required to be registered with ASIC nor provide financial reports. As a result, ASIC has no information on how many funds exist or assets under management.

It found that information relied on by regulators came from surveys taken by third-party sources that reflected “particular biases” and that certain types of fund managers were unlikely to participate.

“Better data and analytics for private markets will enhance transparency, which in turn makes it easier to manage risk. ASIC cannot do its job in the dark,” Mr Longo said, noting that other jurisdictions were collecting data on managed funds. The US, for instance, required data about fund liquidity risk.

While ASIC was in consultation with private market investors on disclosure, it said it was also attempting to determine whether existing regulatory settings for public markets need to be re-examined and debated.

“This paper is the next step in building a regulatory roadmap for Australia’s public and private markets, and we are very open to consideration of whether ASIC needs to change or reduce regulatory burden,” Mr Longo said.

“There may be opportunities to improve the attractiveness of Australian markets, and ASIC is very open to these ideas.”