Deciphering ASIC's Private Markets Review: Where Are We Heading in 2025?

Introduction

In the wake of the Hayne Royal Commission, Australia has seen an increase in regulatory oversight of the banking, financial services, and superannuation sectors. This heightened attention, combined with a slowdown in public markets activity, has brought the role of private capital in the nation’s broader economic framework into the spotlight.

As the private markets have grown, and regulation becomes a more often used tool for managing market risks, discussion has, inevitably, turned to whether private capital is adequately regulated.

In this context, the Australian Securities and Investments Commission (ASIC) has identified the private capital markets, and its interaction with the public capital markets, as one of its key concerns going forward. Concurrently, the Australian Prudential Regulatory Authority (APRA) and the Reserve Bank of Australia (RBA) have indicated their intent to scrutinize private markets more closely.

This insight summarises the actions currently being taken by Australia’s capital markets regulators regarding private capital, and outlines where we see developments in 2025.

What is happening?

ASIC

As part of its corporate plan for 2025, ASIC has identified the changing dynamics between public and private markets as a key issue within its regulatory sphere. ASIC has a broad remit, and the issues identified in its corporate plan do not necessarily convey the full scope of work and surveillance that ASIC has in train at any given time. However, the plan is intended to provide insights for Australian businesses and consumers.

Consistent with this plan, in July 2024 ASIC established both a dedicated team to investigate conflicts of interest and assess how private credit firms value their assets and established a task force to explore the need for additional regulation in the private markets.

The activities of the task force have included enhanced monitoring and reporting on market cleanliness beyond public equity markets and seeking feedback on whether the current regulatory settings and approach to supervision need to evolve with changing market dynamics. The findings of the task force are expected to be reported by ASIC possibly as early as the end of February 2025.

In parallel, ASIC has announced an increased focus on private markets through its surveillance work. That work has been focussed on a review of the governance processes and practices of a sample of responsible entities of retail private credit funds, including their asset valuation and liquidity management practices.

ASIC’s initial focus appears to relate to conflicts of interest and confidentiality of client information with a particular focus on market intermediaries as a means of gaining a wider understanding of the role of private credit and other private markets transactions. Overall, we understand ASIC plans to continue to gather data from the industry to inform its approach to the private markets and private credit.

APRA

While less central to the discussion in this insight, when launching APRA’s current corporate plan, Chairman John Lonsdale foreshadowed that the largely unregulated private markets should expect increased scrutiny. Similar has also been foreshadowed by Basel, the Council of Financial Regulators (i.e. APRA, ASIC, the Australian Treasury, and RBA) and the Financial Stability Board.

Subsequently, Executive Director of APRA, Carmen Beverly-Smith, identified ongoing issues with unlisted asset valuations, including a lack of clear revaluation triggers and infrequent valuations of certain unlisted assets.

APRA is now firstly, concluding a deep dive review of asset valuation and liquidity management practices for a cross-section of large and mid-size trustees with significant exposure to unlisted assets and secondly,  stress testing the $3.9 trillion superannuation industry for potential contagion sources.

RBA

RBA's most recent analysis of Australia’s capital markets is reported in its "Financial Stability Review" dated 23 September 2024.^[1] The report draws heavily on analysis from the International Monetary Fund (IMF) and explores how private credit could affect wider financial stability.

Why do we think this is happening?

Growth of the private capital markets and decline of public capital markets

Both public and private capital markets are crucial to Australia’s economy, each playing a distinct role in wealth generation. However, private capital markets operate differently from public markets and are inherently less transparent.

Consistent with global trends, Australia’s public capital markets have experienced decline in recent years, while private capital, as an asset class, has experienced significant growth. In the Asia-Pacific sector, private assets under management are estimated to have expanded by 30 times in the 20 years to 2022, to US$91 billion^[2]. In Australia, assets under management of private capital funds and other non-bank investors are now in the range of A$200 billion^[3]. This trend is expected to continue, at least in the medium term.

This redistribution of capital, from public to private, has prompted market regulators to reevaluate traditional wisdom and consider the potential vulnerabilities and risks that may accompany the growth of private markets.

A recurring theme among Australian regulators is the need for enhanced visibility of the private capital sector before implementing any regulatory actions. Despite the attention, the interplay between public and private markets is constantly evolving, and regulators themselves admit that they do not fully understand these complexities.

Increased nexus between the political constituency and the private markets

Most working age Australians now have indirect exposure to private assets through their compulsory superannuation savings.  This feature of the Australian retail market (i.e. through membership of superannuation funds) brings Australian retail investors closer to private capital than in some other parts of the world. This explains, in part, the increase in the interaction with, and influence of, the private markets.

When capital of this type (which has historically been invested in the public markets) is instead invested in private assets, the nexus between the private and public markets deepens and the performance of private investments are felt more acutely by the broader economy.

It is worth noting that APRA already enforces Prudential Standard SPS 530, which requires the trustees of APRA regulated superannuation funds to implement stress testing, valuation practices, and liquidity management. Although these measures are not specific to private capital, they could be utilised by APRA to regulate superannuation investments in private capital.

Comparative Positions of Peer Regulators

ASIC has noted that international regulators and policymakers are also examining and responding to changes in private markets, underscoring the necessity of keeping abreast of regulatory developments in other jurisdictions.

In this respect, the Hong Kong Monetary Authority (HKMA) in April 2024 published a memorandum concluding that while systemic risks in the Asia Pacific private credit sector may be contained, certain developments warrant further monitoring. These include the launch of open-ended private credit funds and the use of credit lines, which may contribute to liquidity mismatch and leverage risks. Consistent with the theme of regulators requiring more data, HKMA concluded in its memorandum that its analysis is limited by partial information.

The International Monetary Fund (IMF), in its 16 April 2024 report "The Rise and Risks of Private Credit," recommended a more intrusive supervisory and regulatory approach to private credit funds, their institutional investors, and leverage providers. The IMF also called for the closing of data gaps to allow for comprehensive risk assessment, enhancing reporting requirements, and strengthening cross-sectoral and cross-border regulatory cooperation.

A more nuanced perspective was offered by SEC Commissioner Hester Peirce on 15 October 2024^[4], who argued that existing regulatory tools, combined with market discipline, are sufficient to address the risks associated with private credit in the SEC’s jurisdiction.

What do we think will happen next?

Report of Task Force and Consultation

Looking ahead, ASIC is expected announce its task force findings in the first quarter of this year, although we do not consider that timing to be set in stone. We would expect the report to provide the framework for a period of broader consultation with key capital markets participants and stakeholders. It would be typical for such periods of consultation to remain open for 3 to 6 months. It is only following the distillation of such consultation that ASIC would be able to recommend any changes to the regulation of the private markets, on an informed and considered basis.

Relevantly from the perspective of introducing any proposed new regulation, a Federal election is expected to be called during the early part of 2025 and would likely elongate the period before which any such new regulation is introduced.

There may be some measures ASIC could take without additional regulation through seeking to influence the market in its views about what existing regulations require of market participants in private markets.  This could include expressing views on the scope of the requirements of Australian Financial Services Licence holders and their obligations to provide financial services “efficiently, honestly and fairly” and to have adequate arrangements for the management of conflicts of interest.

Measured and Incremental

ASIC has also indicated its intention to monitor international developments closely, and we would expect that ASIC’s approach will be informed by international practice (adapted for local markets).

The sentiments expressed by SEC Commissioner Peirce, who emphasised the importance of understanding the nuances of private credit without succumbing to unwarranted fears, are salient in the current approach of ASIC. As the evolving dynamics between private and public markets are not a novel phenomenon, but rather the function of longer-term trend, any changes to regulation should be measured and incremental rather than blunt and disruptive.

Please feel free to reach out if you would like to discuss any aspects of this insight further. Our Private Capital coverage team is monitoring developments very closely, and we intend to follow up with you after ASIC releases its report on the findings of the task force.