Opinion: Is Australia's intensifying scrutiny of private markets justified?

There is growing debate in the financial industry about the Australian Securities and Investments Commission (ASIC) decision to establish a specialised unit to intensify scrutiny of private markets.

“That is actually a major priority for us. The Commission decided just over the last couple of months that [scrutinising private markets] is a top-five priority for ASIC in the coming 12 months, and we've actually set up a specialised unit within ASIC to engage with the market," Joseph Longo, chair of ASIC said in an interview with Bloomberg on July 24.  

The decision follows years of mounting concerns from both ASIC and the Australian Prudential Regulation Authority (APRA) regarding the opacity and valuation methodologies employed in private markets.

INCREASED SCRUTINY

The rationale behind ASIC's heightened focus on private markets is deeply intertwined with the evolving investment strategies of superannuation funds. 

Also read: Australian pension funds go global in search of assets

Driven by the pursuit of higher returns and diversification, funds like AustralianSuper, with over A$300 billion ($197 billion) in assets, have significantly increased their exposure to unlisted assets.

Major superannuation players are investing billions in infrastructure projects, private equity, and direct real estate. Some funds have even ventured into niche areas like venture capital and property development.

However, this shift towards less liquid assets, while potentially lucrative, raises concerns about potential illiquidity risks, particularly during periods of market volatility.

Also read: How Australia's second-largest pension fund navigates liquidity risk

Unlike their publicly traded counterparts, unlisted assets lack a readily available market price, making accurate valuation a complex endeavor.

This opacity raises concerns, at least with ASIC, about potential mispricing, which could directly impact fund performance and, ultimately, the retirement savings of millions of Australians. 

CONCERNS AND CONSIDERATIONS

Despite these valid concerns, scepticism surrounding the new unit's necessity persists. Critics point to robust valuation practices already employed by many large super funds. 

Funds like Aware Super, UniSuper and the Australian Retirement Trust, for example, have asserted to AsianInvestor that their directly owned unlisted assets undergo independent quarterly valuations, which is considered an industry 'best practice.'

Also read:  UniSuper discusses unlisted asset valuation as regulatory scrutiny rises

Moreover, the superannuation industry, entrusted with trillions of dollars in retirement savings, has a vested interest in upholding its reputation and maintaining investor confidence. 

Earlier this year, Andrew Boal, partner in actuarial consulting at Deloitte offered AsianInvestor a nuanced perspective on the valuation of unlisted assets.

"There is often an underlying perception that there is a straightforward discrepancy between the valuations of listed and unlisted assets, which might imply that unlisted assets are consistently mispriced or not transparently valued," he said.

Boal noted that Australian super funds have a vested interest in correctly valuing these assets.

"It would be very shortsighted, but that would be one of their concerns -- that if you downgrade an asset and then underperform, that will damage your brand, and maybe lose some members and cashflow."

FINDING A BALANCE

While existing frameworks and industry self-regulation undoubtedly play a crucial role, the sheer scale and continued growth of unlisted assets within superannuation portfolios would suggest a necessity for a proactive and evolving regulatory approach. 

ASIC's new unit, rather than signalling a distrust in existing structures, should be viewed as a necessary evolution in response to a changing investment landscape.

Also read: Australian regulatory scrutiny of unlisted assets reflects global trend

So far all of the major superannuation funds that AsianInvestor has spoken to are in favour of the new breadth of oversight, and most have been meeting regularly with ASIC and APRA to  ensure the right balance is struck between fostering innovation and ensuring proper oversight.

ASIC's new private markets unit should serve to strengthen Australia's already robust pension system, which continues to set global standards for regulatory best practices in an evolving investment landscape.