ASIC ups scrutiny of private market funds

ASIC is clamping down on the rise of private markets as it is concerned about valuations and their impact on the public counterparts.

In its 2024–25 corporate plan, the regulator said a strategic priority is to drive consistency and transparency across markets and products. 

This includes outcomes in public and private markets and the existing and emerging financial products, including new market participants. 

It referenced the “significant growth” of private markets and its implications for public markets. 

Research by Preqin of private wealth investors in APAC found Australia had the greatest proportion by number of investors at 23 per cent. It noted ASIC’s plan could lead to additional regulation of the sector in the future. 

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The expected time frame to complete this is two years, the corporate regulator stated.

ASIC chair Joe Longo said: “While Australia’s private markets are dwarfed in size by our listed equity markets, their opacity presents an outsized risk to market integrity, particularly as more investors become exposed. 

“The addition of a new strategic priority aimed at driving consistency and transparency across markets and products puts all market participants on notice.”

Last month, Money Management wrote how research houses were concerned about the number of private credit funds launching to the market recently given their lack of transparency and illiquidity. 

While much of the money going into this asset class comes from superannuation funds and institutional investors, a growing number is coming from high-net-worth individuals seeking higher returns without the volatility of the stock market, particularly as more people reach the sophisticated investor threshold.

In response to ASIC’s announcement, Emanuel Datt, chief investment officer at Datt Capital, said: “Private credit is inherently an opaque asset class. This opacity, coupled with the illiquid nature of these investments, should be a focal point for investors to be aware of.”

This opacity could lead to inconsistencies in asset valuations, heightening the risk of significant losses. 

“When financial activity declines and asset price volatility rises, the demand for cash on hand intensifies. This is especially true for individual investors, who are generally more vulnerable to unexpected changes in circumstances than large institutional investors. The closed-end nature of many funds within this asset class can pose significant challenges for investors,” Datt added. 

Paul Miron, co-founder and managing director of Msquared Capital, said there is a dislocation in investors' understanding of private markets which will not necessarily be solved by regulation.

“I firmly believe that transparency and accountability are not just important, but absolutely crucial for the long-term success and stability of the secured private credit market in Australia.

“However, greater regulation will not resolve the lack of investor understanding on the part of some investors. Investing in private credit is isometrically different from investing in and understanding shares.

“There is an apparent dislocation in market knowledge; some investors merely chase double-digit returns without asking some fundamental questions regarding the quality of assets that back the investment, while others are more experienced and know the key areas to focus on.”