Investment alert: ASIC sees danger in ‘opaque’ private markets
Investment dollars are shifting from public sharemarkets. Are your retirement funds at risk?
A new report has focused attention on the changing nature, and risk profiles, of the investment and credit markets into which most Australians invest to generate income to fund their retirement.
We do that through superannuation funds, which invest in Australian and overseas shares, property, cash, and more.
Shares in companies are bought and sold through markets, public sharemarkets being the largest.
However, the discussion paper, by the corporate regulator ASIC, raises questions about the growing trend by Australian companies to invest outside of the public sharemarket, preferring instead less regulated and opaque private capital markets.
Private capital markets have swollen to some $150 billion in assets. Bear in mind, public markets are worth more than $5 trillion. But ASIC says it’s now time to learn more about this ‘opaque’ investment platform.
Private assets can include anything from a loan for a commercial property development to an ownership stake in Sydney Airport.
ASIC’s other area of interest is the impact the ballooning Australian superannuation industry, which now control more than $4.1 trillion in savings, is having on the markets. Super funds are also investing in private markets, while some equity funds are planning to release products that allow smaller investors to access private assets.
“We are keen to understand how the growing dominance of superannuation in Australia’s economy is influencing our markets, given its crucial role in securing our financial wellbeing on retirement,” the report said.
ASIC’s key concerns are protecting investors from the risks these trends may pose and continuing to make Australian markets attractive to investors.
“Public and private markets support one another, and both are critical to our economy, so it’s important we approach this from both an opportunity and risk perspective.
“The critical point for ASIC is whether there is a need for interventions to address risk or adjustment to how regulation operates to take advantage of opportunities important for the attractiveness of our capital markets,” the report said.
- The size of unlisted investments (in the private market) has tripled and could pose risks to the wealth of ordinary people because the sector’s growth has come without the same requirements to clearly disclose fees, performance and the value of assets as public markets have.
- This could mean investors are not informed about how a business is performing, how fees in the fund are accrued, and even if the value placed on an asset is in line with publicly traded equivalents.
Private assets do not trade on an open exchange, they cannot be easily bought or sold by smaller investors, and their price is less transparent.
ASIC says, “We are also 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.”
In its report, ASIC said there would be “more failures in private credit investments, and Australian investors will lose money”.
While private credit funds advertise higher returns, investors in some firms have found it difficult to extract their money.
The Australian Financial Review (AFR) reported one firm, Gemi Investments, stopped redemptions from its $300 million First Mortgage Fund, The AFR reported late last month. “MaxCap, another firm, said it may have to delay distributions from one of its equity and debt funds after real estate projects went sour,” the AFR reported.
Investors complain it can be difficult to work out what assets funds have been lending against, and what assets are in their portfolios.
“Opacity, conflicts, valuation uncertainty, illiquidity and leverage in private markets are the key risks,” ASIC’s report reads. “Data is essential. International peers are increasing access to reliable data on private markets. ASIC needs better recurrent data to more accurately assess risk.”
“It’s not the role of the regulator to tell investors where to put their money or where to raise finance,” ASIC chair Joe Longo said. “It is the role of the regulator to know what is going on in the markets maintaining high standards of disclosure and conduct, and for all of us to have integrity.”
ASIC’s Moneysmart website has information for consumers about how to choose the right investments to reach their financial goals.
