Reporting, valuations, and regulation of private markets are under focus.
This Australian Securities and Investments Commission (ASIC) has released its discussion paper ‘Australia’s evolving capital markets: A discussion paper on the dynamics between public and private markets’. This follows the taskforce established by ASIC in 2024 to explore the need for additional regulation in private markets.
The Discussion Paper poses questions designed to deepen and sharpen ASIC’s understanding of how Australia’s capital markets operate. Particularly, understanding how to balance dual goals – ensuring private and public capital markets are open, accessible and support economic growth, while protecting against risks.
Shift in public markets
There has been a significant shift in the flow of funds away from public markets and into private markets in the last decade, both in Australia and globally. Global and domestic economic and geopolitical factors have contributed to this trend, including government responses to the COVID-19 pandemic, inflation and interest rate responses, geopolitical tensions, shifts in global trade and the energy transition.
Between 2014 and 2024 in Australia:
- the value of equity raised in IPOs declined by 82% from $22.9b to $4.9b
- the value of private equity funds (AUM) increased by 131% from $28.5b to $65.9b
- the value of private credit funds (AUM) increased by 240% from $0.6b to $2.8b
- the value of the superannuation system increased by 118% from $1.872t to $4.08t.
But is this shift structural or cyclical?
ASIC concluded in ‘Report 807 Evaluating the state of the Australian public equity market: Evidence from data and academic literature’ that it is too early to call the current reduction in the flow of funds into public markets in favour of private markets in Australia a ‘structural shift’, suggesting it is more cyclical in nature.
Perhaps then it is too early to consider regulatory intervention in private capital markets if this is merely the high point of a market cycle.
Report 807 sets out three main hypotheses for the decline in the number of public companies:
- the decline is attributed to an increase in the regulatory burden and the costs associated with being listed
- the nature of companies has changed, reducing the benefits of being listed
- the rapid growth of private markets has made it easier for private companies to access capital.
The pressures of public markets also lead to an increased focus on short-term goals or social factors over longer-term strategies.
These downsides of public markets have contributed to the enormous growth of the private capital sector. This growth, combined with a much lower level of regulation of private markets historically, has now given ASIC cause to ask whether this growth is giving rise to systemic risks and, if so, what should they do about it?
Private equity
Private equity is a growing asset class in Australia. There has been an increase in the number of funds and the value of assets under management. There has also been an increase in investment by foreign private equity funds in Australian assets.
Investment in private assets has also been a diversification strategy for Australian superannuation funds. Many large superannuation funds have publicly indicated their intention to increase their exposure to private market assets, citing benefits such as investment time horizon, returns and enhanced control over private assets. Australia’s two largest superannuation funds, Australian Super and Australian Retirement Trust, have invested approximately 22% of their AUM in private assets.
Given the increased exposure of Australians to private equity, whether direct exposure as wholesale investors or through their superannuation, ASIC is concerned that the sector’s growth has come without the same requirements to clearly disclose fees, performance and the value of assets as public markets have.
New private equity models have also begun to filter into the Australian private equity sector, with continuation funds and GP staking two examples which have reached Australian shores.
Continuation funds facilitate the rollover and transfer of private assets to a new fund. Limited partners are usually given the choice to sell their pro-rata share of the assets and exit, roll their interest into the continuation fund, or a combination of both.
Continuation funds have gained prominence in the aftermath of COVID-19 with many private equity funds holding assets longer than anticipated due to the challenging exit environment.
Continuation funds give rise to heightened risks relating to conflicts of interest and valuation given they often involve the transfer of assets between funds managed by the same fund manager.
GP staking involves a GP staking fund taking a minority investment (typically 10% – 40%) in institutional capital managers, providing investors with access to management fee income, carried interest and balance sheet returns.
The challenging market for private equity exits (including the lack of IPOs) has given rise to a significant amount of dry powder in private equity markets awaiting deployment, amounting to $43.8b in March 2024.
Australian private equity fund managers have also been impacted by a significant increase in regulation and fees in the last five years, including changes to FIRB rules and fees, new ASIC fees for schemes and takeovers, and the changes to Australia’s merger clearance regime which are due to commence on 1 January 2026 with the voluntary transition period to take effect from 1 July 2025.
Private equity fund managers will have the challenge of balancing the need to deploy dry powder against continuing geopolitical uncertainty, a higher interest rate environment and increased regulation on the horizon in 2025.
Private credit
Private credit has received significant attention as a growing asset class in both Australia and globally. Global private credit AUM quadrupled over the decade to 2023, to US$2.1trillion. Private credit funds provide a relatively small proportion of debt capital funding in Australia compared to banks, in contrast with other jurisdictions where banks play a much smaller role in lending.
Private credit markets may be becoming more accessible to a wider range of investors in Australia. However, while experienced credit managers can achieve stable returns with strong downside protection, investment in private credit funds also carries risks, including:
- the illiquid nature of some investments
- leverage, particularly with the increasing use of NAV and other fund financing products by credit funds
- potential (or perceived) conflicts of interest between managers and investors including in relation to fees and portfolio management
- valuation uncertainty.
Given the rapid growth of the sector and the ever-increasing number of new credit funds, it is unsurprising that regulators like ASIC are focused on ensuring that participants in the private credit market understand the potential risks and challenges when investing. This is particularly pronounced for retail investors or ordinary Australians who are increasingly exposed to private credit via their superannuation funds.
ASIC is undertaking work to examine private credit and risks for retail investors more closely. This includes a thematic surveillance of retail private credit-focused funds, reviewing governance and practices relating to disclosure, distribution, conflicts, valuation and credit risk management.
ASIC has also stated that one of its 2025 enforcement priorities is focusing on business models that are designed to avoid consumer credit protections.
Despite the closer regulatory scrutiny, private credit is expected to continue its rapid growth in Australia throughout 2025. ASIC has stated that it does not want to slow this growth, noting that access to flexible credit is increasingly playing a key role in capital raising decisions in Australia – from private companies using private credit instead of a sell down, to new energy projects using flexible debt as a more patient form of capital.
Private market risks
ASIC has articulated in the Discussion Paper what it sees as the risks associated with the rise of private capital. These risks include:
- misclassification of retail versus wholesale investors
- unfair treatment of investors (e.g. preferential rights for some investors and not others)
- management of conflicts of interest
- valuation of illiquid assets
- leverage in the sector
- illiquidity risk.
ASIC has asked market participants to comment on the extent to which they observe these risks in the system and how they might be addressed.
ASIC is also concerned about the flow on effects for the broader financial system, including market integrity and financial stability.
How might ASIC address these risks?
ASIC has flagged reporting and valuations as major areas of focus for their review of the private capital sector.
One of the drivers of private markets is the perception that private market assets outperform those in public markets. However, the lack of reporting on private capital funds makes it difficult to do any like for like comparisons. Performance can therefore only be measured after funds have been returned to investors.
In ASIC’s response to Treasury’s review of the regulatory framework for managed investment schemes, ASIC recommended introducing a legislative framework for the recurrent collection of data on managed investment schemes. Data could be collected based on information fund managers already track for their day to day operations, including the number of managed investment schemes, the value of their AUM, investment flows, asset allocations, liquidity and cross-investments between managed investment schemes, distributions to investors, performance information, including data specific to asset classes (for example, arrears rates for private credit funds) and the use of leverage through borrowing and derivatives.
Regulatory reporting obligations for private funds lags behind global best practice. The United States, United Kingdom and New Zealand all collect data about their fund management sectors to better information regulators.
Introducing reporting obligations may assist policymakers and regulators in improving the financial system’s performance and monitor financial stability risks.
Private markets pose a challenge from a valuation perspective. Valuations are mostly based on methodologies and judgments rather than publicly available information, and may not always be independent. This affects both investor decision making and the system as a whole.
ASIC has flagged increasing its surveillance of private market activity by focusing on valuation practices, including conflicts of interest adversely affecting such practices.
What next?
ASIC has set out a number of questions in the Discussion Paper and asked for feedback from market participants by 5pm on 28 April 2025. ASIC expects to communicate publicly about responses in the second half of 2025 as well as engage in a series of roundtables to promote discussion.
