New Zealand public and private capital markets participants should keep an eye on this consultation process, given we are facing many of the same trends here in New Zealand and the fact that any regulatory change in Australia is watched closely by our regulators.
Future of public markets a cause for concern
The decline in Australia’s public markets is a central theme highlighted in the discussion paper. It points to the low levels of initial public offerings (IPOs), with companies choosing to stay private where new funding and sell-downs are now more accessible, while others are choosing to list in the United States. New Zealand was called out by ASIC as experiencing the same trend, with ASIC noting that New Zealand’s public markets have attracted few new listings over many years and several New Zealand companies having instead decided to list on markets abroad (including in Australia). ASIC is concerned about the future of Australia’s public equity markets and is of the view that Australia should not be complacent, nor should it assume that adjustments to the markets’ regulation will secure the future of those markets.
Emergence of private capital
ASIC believes that the changing dynamics between public and private capital markets is evident worldwide. It notes that over the past decade, global private capital assets under management (AUM) have tripled to an estimated US$14.6 trillion (as at June 2024), and that the future of capital markets is tied to developments in private markets. ASIC says that it must focus on understanding and adjusting for new or amplified private side risks, given the move from public to private markets and the impact on the balance of risks.
The discussion paper highlights the growth in private credit as an area of particular interest. ASIC doesn’t see private credit as systemically important to the Australian economy yet, but worries that there hasn’t been the stress testing of risks associated with a bigger private credit market, particularly when invested alongside private equity. ASIC believes there will be more failures in private credit investments, and that Australians will lose money. As a result, it is increasing its focus on private credit.
Four focus areas
The discussion paper is comprehensive and highlights four key areas of focus for ASIC.
- Healthy public markets
How Australia’s public markets can be made more attractive to entities seeking to list or raise capital, while maintaining appropriate investor protections.
- Private market risks and market efficiency and confidence
The risks associated with investments in private capital funds. These include opacity and unfair treatment of investors, conflicts of interest, valuation uncertainty, investment illiquidity and leverage risks. It asks for feedback on the regulatory settings and oversight of private capital markets, the risks for investors, the role of incentives and how these are managed in practice by private market participants. The critical point for ASIC is understanding whether there is a need for intervention in private markets, whether it is for ASIC or another regulator to consider, or whether ASIC leaves the market and wholesale investors to their own devices.
- Retail investor participation in private markets
The limited access to private capital markets that retail investors have and whether this is cause for concern. It also asks whether any measures could be implemented to improve such access, while maintaining sufficient protections given potentially heightened risks, including limited access, liquidity challenges, complexity, information asymmetries and adverse selection risks.
- Transparency and monitoring of the financial system
Increasing access to reliable data on private capital markets by international peers. ASIC says that there is less transparency and oversight in those markets and that ASIC needs better recurrent data to more accurately assess risk.
Relevance to New Zealand
New Zealand is experiencing the same trends when it comes to capital markets and we expect any recommendations from ASIC will be considered carefully by regulators here in New Zealand.
The decline in New Zealand’s public capital markets has been well identified. Over recent years various initiatives having focussed on mitigating the decline, such as the Growing New Zealand’s Capital Markets Report in 2019. A number of those initiatives have been picked up by the current government.
We have also seen the emergence of private capital, but haven’t had the focus on the need for greater transparency and regulatory oversight of the private capital market. If that is the direction that ASIC goes, something similar may be adopted here, notwithstanding the current government’s strategy of deregulation.
Next steps
ASIC expects to release an update later in 2025 that will outline key feedback and how it will use the feedback to inform its priorities and work program. ASIC indicates this will be a programme of work for it for the next 12 months.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.