“I wish I could say this is an isolated example,” Kirkland said, explaining the regulator’s concern about a small cohort of advisers who transfer client funds into high-risk investments after being referred by cold-calling telemarketers.
The industry has little chance of fighting through the legislative backlog and getting immediate wholesale change made to the ill-designed CSLR. There are things the government can do in the interim, said the FAAA, but who’s listening?
‘Markets are changing’: ASIC’s gaze turns to private capital providers
ASIC has put private market providers on notice, with one of its new batch of commissioners, ex-financial adviser and lawyer Simone Constant, admitting that “keeping pace” with the burgeoning sector is a priority for the corporate regulator.
Constant, a 25-year financial services veteran who was poached by ASIC 6 months ago when serving as CBA’s chief risk officer, spoke at the Stockbrokers and Investment Advisers Association national conference (SIAA) recently about the regulator’s current areas of focus, which included the usual array of market supervisory and enforcement priorities.
The newly minted commissioner specified two areas of special interest, however. The first came as no surprise, with Constant highlighting the need for superannuation funds to provide more “transparency and accountability”. The second came as more of a fresh warning to private market participants – ASIC is aware just how fast sectors like private equity, private debt and venture capital are moving, and is newly determined to stay abreast of related activity and maintain appropriate regulatory settings.
“In terms of markets priorities this year, something that’s on our mind is making sure we’re really equipped for – and we are – understanding the rise of private capital and private markets,” Constant revealed, noting that funds under management have increased dramatically amid myriad global factors. “Markets are changing,” she added.
Estimates for how much capital is sloshing around in private markets – as opposed to those invested in listed companies – varies. McKinsey and Co. puts the figure at $US13.1 trillion with nearly 20 per cent annual growth since 2018, while EY estimates US$24.4 trillion. According to the Reserve Bank of Australia, domestic private equity funds alone (sans private credit and venture capital) have tripled in size to $66 billion since 2010 (as of April, 2024).
A core driver for this growth in the US, and increasingly at home, is the reticence of companies to list publicly and face increased reporting requirements and regulatory scrutiny.
Tapping into this reluctance, a proliferation of mainly private equity players with scale and backing have come to market, setting up funds and applying their own degree of oversight and expertise over staked entities. This could mean anything from ground up, granular management expertise to M&A driven strategy or strict board-level activity.
Fuelling this rise, and something ASIC is acutely aware of, is the desire of superannuation funds to diversify into private capital as an alternative to traditional equities, with well-capitalised private equity funds giving large superannuation funds access to a range of lucrative, less-than-liquid ventures.
Recently, private equity activity has flattened somewhat as increased borrowing costs have risen in line with interest rates. But the trend is clear, and the private capital surge is expected to see through cyclical tides.
The regulator knows that such a seismic trend in financial markets will have significant ripple effects. The funds themselves are regulated products, but their exponential growth, increasing leverage and market-warping ability demand singular attention. So too, do the companies that now eschew listing and coming under a stronger regulatory umbrella. More large, unlisted companies in the market presents it own set of concerns, chief among them reduced oversight by regulators.
The RBA raised its own set of concerns in its April report on the private equity market, noting that there are “upside and downside risks to economic growth and capital efficiency”. Private equity supports the efficient allocation of capital to companies, the RBA stated, especially new innovative businesses that may struggle to raise capital elsewhere. But it also cited research indicating public markets are more efficient at allocating capital than private markets, and lamented the decreased transparency and difficulty in comparisons that came with less company listings.
ASIC, no doubt, sees the benefit of private markets as a strong and growing vertical in a healthy, diverse economic and investment landscape. But it’s a messy game, and ASIC is the body charged with keeping it clean.
“Whether it’s private equity or other emerging markets, we’re just making sure that when we think about market conduct, market supervision and a clean market, we’re focused on that whole and changing market,” Constant said.
“And just to digress for a second, you can hear from what I’m saying [that] I’m very proud of the cleanliness of Australian markets and our reputation for that,” she added. “And we know the value that brings. Therefore, we need to keep pace with what the market is.”
