Industry says further disclosure, not overregulation, needed in private markets

The consensus among alternative investment managers and the broader industry is that an added regulatory impost would stifle returns in private markets.

While the sector sees merit in additional disclosure requirements, there is broad consensus that a heightened regulatory burden could undermine the fundamental appeal of the asset class.

Following the release of ASIC’s preliminary views on the dynamics between public and private markets, Andrew McVeigh, managing partner at Remara, told Super Review's sister title InvestorDaily that while the private credit operator welcomes additional disclosure, an increase in regulation would likely stifle performance and erode returns.

“I don't think more regulation is going to necessarily improve the outcome of the performance and all that will do potentially is erode returns. For investors in the private market, you get a step up in returns from it being private and not having the regulatory overlay of a public vehicle or public investment,” McVeigh said.

“I think leaving as little regulatory impost is the best outcome for everybody but I do definitely believe there needs to be further disclosure.”

According to McVeigh, the missing piece in private credit is a universal disclosure regime that clearly defines portfolio risks for incoming investors - similar to the disclosure requirements imposed on hedge funds.

“There are specific disclosure requirements in a regulatory guide for hedge funds that we comply with … That same disclosure regime is not there for credit and I think that's probably the biggest piece that is missing, that is something that is universal and clearly defines for incoming investors what the true risk of that underlying portfolio is,” McVeigh said.

Namely, hedge funds in Australia must adhere to strict disclosure requirements, with ASIC’s Regulatory Guide 240 (RG 240): Hedge funds – Improving disclosure, dictating transparency regarding investment risks, fund structure, fees, and governance.

“We've started to move towards that type of reporting and framework on the proviso that that's where we think the industry should ultimately end up, where it's a very, very consistent measurement of portfolio risk,” McVeigh said.

He added that Remara will share its ideas with ASIC, and sees the regulator’s key challenge as striking a balance between regulation and reporting without undermining the intrinsic nature of private markets.

“We will definitely comment on the basis that we are direct to retail. We do have a number of insights,” he said.

“The types of private credit assets that we have throughout our platform, that the retail investors get access to, are heavily scrutinised and regulated with multiple layers of governance and independence. They're built on what are tried and tested structures.

“For us it's actually really important that ASIC realises there are pockets of credit that have substantial governance and independence and strong regulation attached to them.”

Alan Greenstein, co-founder of Zagga, a specialist manager focused on real estate private credit, is not surprised private markets have captured the attention of the regulator, given their record growth.

“The regulators naturally want more insight into the investments, and of course, investors also appreciate transparency,” he told Super Review, adding that Zagga will engage with ASIC if invited for comment.

Like McVeigh, he stressed that when it comes to regulation, “one size does not fit all”.

“It’s important to get the right regulatory oversight and mechanisms in place,” he said.

“I truly believe that credible private market players would be 100 per cent on board with greater transparency, minimum best practice standards, and a level playing field. Ultimately, with relevant, appropriate, fit-for-purpose governance.”

However, rather than waiting for ASIC to act on transparency, he believes the industry should "take initiative" by developing its own code of conduct to promote best practices, addressing key issues such as valuations, pricing, and liquidity.

“I believe a code of conduct would go a long way in ensuring integrity, trust, and credibility with both investors and the regulator,” Greenstein said.

McVeigh, however, believes that while a code of conduct is a “great concept”, it's very hard to execute in practice.

“I think the easiest thing here is a regulatory guide,” he said. “I don't think that's a tremendous impasse to any manager”.

Industry willing to engage

While ASIC chair Joe Longo suggested on Tuesday that the regulator’s previous engagement with the private markets sector, particularly in seeking feedback, has been "inconsistent", Super Review understands the industry is broadly welcoming of the opportunity to respond.

In a media briefing ahead of the paper’s release, Longo suggested: "Companies should be on notice that when the regulator seeks information, my expectation, ASIC’s expectation is that you provide it.”

Like both McVeigh and Greenstein, Regal CEO Brendan O’Connor confirmed on Wednesday the asset manager will gladly respond to ASIC.

“We welcome ASIC’s review, Regal as a manager of public and private assets is well placed to participate and help in any way we can in improving private asset reporting,” O’Connor said on Wednesday during a result’s webinar.

“As ASIC recognises itself, public and private assets are really important to the health of capital markets and we see a valuable role for both going forward.”

Outside of the industry, the other important stakeholder identified by ASIC is the superannuation sector, with the regulator’s paper putting the onus on the sector for both the contraction in public markets and growth in private markets.

By Wednesday afternoon, ASFA and AustralianSuper had confirmed they would respond to the regulator.

Also planning to lodge its submission is the Financial Services Council (FSC), with the council confirming to Super Review that its submission will focus on both its super and funds management members.

In a statement shared on LinkedIn on Wednesday, the FSC’s CEO Blake Briggs said while the council believes the growth in private markets warrants “regulatory scrutiny”, “the sector’s success alone should not be the basis for a greater regulatory burden”.

“The FSC does not want to see mature market operators unnecessarily hampered by an overly zealous regulatory crack down,” Briggs said.

He added that the FSC is working closely with its Private Markets Working Group to identify the “strong governance practices” the mature private market operators in its membership reflect.

This, he said, can be viewed as a template for success by superannuation funds and new entrants to the sector.