Private capital funds, managers and superannuation trustees should be on notice 11 min read
Private capital is becoming a growing focus of regulators, both in Australia and internationally, given the ever-increasing flow of capital to the sector in recent years.
ASIC's recently released discussion paper, Australia’s evolving capital markets: A discussion paper on the dynamics between public and private markets (Discussion Paper), provides a timely reminder that Australia's corporate regulator is upping its scrutiny of private markets and is carefully considering its current investigatory and enforcement powers.
In this Insight, we explore the Discussion Paper and outline the regulatory tools ASIC may use to investigate and enforce its concerns, and the steps that private capital funds, managers and superannuation funds might consider to mitigate the risk of enforcement action.
Key takeaways
- 'Private capital' in this context covers a very broad range of investors and asset classes, including private equity, private credit, infrastructure and property funds and managers, as well as (in the current context at least) the increasing portion of superannuation assets that are invested in those funds (and their underlying asset classes).
- ASIC is undertaking an active consultation into private markets. The Discussion Paper raises a number of concerns and seeks responses to a broad range of questions. While currently a voluntary process, ASIC expressly says it may need to take further regulatory action this year.
- Private capital funds and managers should be on notice that they are now under increased regulatory scrutiny and that this could lead to investigations and/or enforcement action, as ASIC seeks to test some of its assumptions. There are active investigations already under way.
- Private capital funds and managers should also monitor ASIC's statements closely and consider whether, in light of the concerns identified (regarding governance, confidential information, disclosure of information to investors and valuations, amongst other things) their policies, systems and controls require uplift.
- Superannuation trustees should monitor developments closely in light of the regulatory focus and their perceived role as 'gatekeepers'.
Background
The value of assets under management (AUM) in Australia's private capital market has been steadily growing in Australia:1 in 2024, the overall value of private capital funds AUM was $148.6 billion, a 161% increase since 2014. Part of this growth is a product of private capital funds raising money from Australia's unique superannuation system, which has also increased by 118% since 2014 to reach a value of $4.083 trillion in 2024. At the same time, the number of initial public offerings (IPOs) in Australia is at its lowest in a decade.2
Against that background, both the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) have made a number of public statements indicating that they intend to apply increased scrutiny to the private capital sector.
- ASIC's 2024-25 Corporate Plan states that one of its 'key activities' will be examining changes in public and private markets, including the 'significant growth of private markets and the implications for the integrity and efficiency of public markets'.3
- ASIC has also recently established a dedicated private markets unit focused on reinforcement of expectations around governance and accountability (including due to the reduced transparency associated with the less-onerous financial reporting), and management of conflicts of interest.4
- APRA has concerns about the robustness of valuations for some classes of unlisted assets, including those relied on by superannuation trustees, as well as the inflation of valuations to support borrowing and broader fund performance measures and goals (ie fundraising).5 This is consistent with the position taken by regulators overseas: in July 2024, Britain's Financial Conduct Authority initiated a review into the quality, robustness and integrity of private market valuation practices.
- Most recently, ASIC's Discussion Paper articulates a range of ASIC's concerns in this space with more precision (which it has been discussing in various public forums during 2024).
- We can expect more from ASIC in 2025, where it has said it will use the feedback it receives on the Discussion Paper to inform its priorities and work program over the next 12 months, including whether it needs to consider any regulatory interventions.
ASIC's concerns
ASIC considers that the key risks of investments in private capital funds include:
- opacity and unfair treatment of investors (eg preferential redemption rights for some investors and misclassification of retail investors as wholesale investors);
- management of conflicts of interest (eg misaligned incentives, related-party transactions and treatment of confidential information);
- valuation of illiquid assets (which impacts investment entry and exit prices, performance measurement and fees);
- vulnerabilities from leverage; and
- investment illiquidity (generally, private market investments cannot be realised quickly to meet an investor’s liquidity needs).
As to how each of those issues might play out among specific asset classes and advisers, governance and conflicts issues are clearly of key concern to ASIC. It has said its concerns are:
- for corporate advisers—governance arrangements; the management of conflicts of interest, staff and insider trading; and the protection of confidential information;
- for wholesale private equity and private credit funds—governance; valuation practices; information rights provided to investors; management and/or performance fees; the management of conflicts of interest, staff and insider trading; the protection of confidential information; and fair treatment of investors;
- for retail private credit funds—governance; valuation practices; the management of conflicts of interest; disclosure; distribution of products; credit risk and liquidity management; and
- for superannuation funds—financial reporting and audits, encompassing valuation issues.
How might ASIC investigate the concerns?
While participation in ASIC's consultation process on the Discussion Paper is voluntary, it may be that it engages in a more formal industry supervisory review, and through that process seeks more specific information from funds and other market participants, including through compulsory information gathering processes (ie requests for documents and information).
Consistent with its approach in other sectors, ASIC may use its surveillance powers to obtain information about the state of the market and then consolidate those learnings into a report. By way of analogy, in scrutinising the retail banking, superannuation and financial advice sectors in recent years, ASIC has adopted an approach of:
- first, publishing guidance or supervisory reports containing expectations and recommendations for the industry—since 2021, ASIC has undertaken supervisory reviews of valuation practices,6 responsible entity governance7 and fund marketing;8 and
- second, a reasonable time after the publication of those reports, ASIC scans the industry for suitable case studies to investigate and possibly commence enforcement action against, with the aim of embedding good practice and motivating industry participants.
Alternatively, it may seek to fast-track that process by running an early test case. There are active investigations in analogous issues that may provide a suitable vehicle.
Regulatory toolbox
Importantly, ASIC notes it intends later this year to publicly communicate its findings from any consultation and surveillance work it conducts, and that there may be a 'need to take further regulatory action'.
If ASIC does choose to take further regulatory action, it may rely on the following existing regulatory levers:
| Item | Description |
| Surveillance powers |
ASIC has expressed a concern that it has a lack of data to analyse the sector and that this is impacting its ability to understand the risks. It points to the more detailed data its international counterparts have (including in the US). While ASIC has said publicly that it is not seeking proprietary data at this stage of its consultation, depending on the response from the industry it may ultimately decide it needs to either:
|
| Publication of regulatory guidance or supervisory report |
ASIC publishes regulatory guides to assist entities to understand the law. Following receipt of responses to the Discussion Paper and further stakeholder engagement, ASIC may publish regulatory guides on the regulation of private capital. ASIC may also release supervisory reports outlining the results of any further research and analysis on the private capital market. Expectations and recommendations in regulatory guidance are (at least in most cases) not themselves enforceable. However, recent experience has indicated that regulators may treat a failure to meet expectations and recommendations set out in published guidance as indicative of a failure to comply with these conduct provisions. |
| General conduct provisions |
Once it has gathered this data, ASIC may consider whether any provisions of the ASIC Act or Corporations Act have been breached. The Discussion Paper sets out some provisions which it identifies may be of concern, including:
|
| Confidential information |
Given ASIC's focus on the protection of confidential information, it may also consider how it could utilise s183 of the Corporations Act, being the obligation not to improperly use confidential information that a person has gained as an employee, officer or director of a corporation, to gain an advantage for themselves or someone else or cause detriment to the corporation. ASIC has recently emphasised the responsibility that companies have in maintaining effective information barriers and policies that govern the handling of inside information (in particular, in relation to proposed transactions that companies are involved in or advising on) in REP 786, released in July 2024.11 There are also more specific Regulatory Guides covering adjacent areas, including RG-264 (Sell-side research), RG-393 (Handling of confidential information: Briefings and unannounced corporate transactions) and RG-73 (Continuous disclosure obligations: Infringement notices). |
| Other regulators |
Regulators other than ASIC likewise have a considerable range of powers at their disposal, relevant for registrable superannuation entities (RSEs) like the industry and retail super funds. APRA, for example, has a comprehensive suite of legally binding Prudential Standards setting out its minimum requirements in relation to a range of areas, including capital, governance and risk management. It also publishes non-binding Prudential Guidelines setting out practices and steps entities can follow to comply with the Prudential Standards. Of particular note in the present context is Prudential Standard SPS 530, which sets out APRA's requirements for investment governance by RSEs. Among other things, the Standard requires RSEs to develop, maintain and implement an effective valuation governance framework.12 The framework must include a board-approved valuation policy.13 APRA also expects that trustees undertake valuations on at least a quarterly basis.14 |
Risk of enforcement action
Recent examples suggest that the risk of enforcement action being taken where regulators' expectations have not been met is likely to be higher in respect of:
- larger entities, noting that penalties are generally increasing and are assessed for bodies corporate based on 'whole of group' revenue, meaning that targeting larger entities maximises the impact of enforcement action;
- entities which are perceived to be outliers in terms of industry standards, or where ASIC can use an entity as an 'industry example' to have a deterrent effect on other entities; and
- high-profile corporate collapses, or where there are public allegations of major compliance breaches.
In relation to the last of these points, we note ASIC recently demonstrated a focus on 'gatekeeper' entities like superannuation trustees. Enforcement action indicates ASIC considers that upstream gatekeeper entities are in a position to enforce higher standards of conduct, and may suggest they could and should have driven better standards where there is a high-profile corporate collapse or major compliance issue.15 As part of its investigation into these gatekeeper entities, ASIC would likely seek to assess whether the onboarding and ongoing monitoring procedures that were applied to the downstream entity were compliant with any internal policies and procedures and/or statutory duties.16
Actionable steps for organisations
In our view, in circumstances where regulatory practice in this area continues to develop, private capital funds, managers and superannuation funds might consider the following steps to mitigate the risk of enforcement action:
- Monitoring guidance: actively monitor for regulatory updates and guidance as and when they are released by regulators, and update internal policies, systems and processes in at timely way once regulatory guidance is available.
- Future-proofing compliance: consider reviewing their existing internal compliance processes against existing standards (ie in advance of specific regulatory guidance being released) in light of statements made by regulators (including in ASIC's Discussion Paper) that certain issues or practices may be the subject of regulatory scrutiny. For example, given the recent indications that regulators intend to focus on the use of confidential information and valuations, private capital funds, managers and super funds might consider conducting a preliminary review of their confidentiality and valuation practices (by, for example, ensuring they're compliant with Prudential Standard SPS 530 - Investment Governance, where appropriate).
- Enhancing review of public statements and disclosures: as noted earlier, disclosure documents and market-facing statements can contain implied representations that an organisation has adequate systems and processes in place about valuations, management and/or performance fees and expected performance of assets. Private capital funds, managers and super funds should carefully consider whether the information used in any market-facing statements and disclosures is accurate, complete and appropriately qualified to reflect potential uncertainties.
Footnotes
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ASIC Discussion Paper, p 11.
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ASIC Discussion Paper, p 7.
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ASIC Corporate Plan 2024-25, page 21.
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Australia Regulator Steps Up Private Markets Focus With New Unit - Bloomberg.
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ASIC finds good practices from COVID-19 review of managed funds’ valuation of illiquid assets, 10 August 2021.
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Governance of responsible entities presentation, January 2022.
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Managed funds to improve marketing oversight following ASIC surveillance, 30 November 2022.
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Corporations Act 2001 (Cth), s601FC(1).
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See, for example, our Insight.
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Report 786 Equity market cleanliness snapshot report. See also Report 787: Review of Australian equity market cleanliness.
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Prudential Standard SPS 530 (Investment Governance), [39]-[41].
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Prudential Practice Guide SPG 530 (Investment Governance), [109].
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'Targeting gatekeeper misconduct' is listed as one of ASIC's 'Other key activities', see ASIC Corporate Plan 2024-25, p 22. The Markets Disciplinary Panel has also recently issued fines (see here and here) for what ASIC terms 'market gatekeeper failures').
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For example, those in s52, Superannuation Industry (Supervision) Act 1993 (Cth), if the gatekeeper entity is an RSE.