The Australian super fund industry embodies a glaring contradiction: born from regulation that propelled it to more than $4 trillion in size, yet opposed to new regulation aimed at safeguarding those assets. Private assets exemplify the disconnect.
ASIC’s private-public market discussion paper is the battleground. And private credit managers – the target of much concern – are the leaders in this dichotomy.
“We had a number of really good responses from private credit fund managers,” ASIC commissioner Simone Constant said to an audience of Investment Magazine’s Fiduciary Investors Symposium in June. “A number of those responses are calling out for some improvements in practices.”
Constant did not call out super fund submissions, or submissions from industry associations, which largely backed the current status quo.
ASFA’s submission said the country already has robust regulatory settings relative to other jurisdictions, and warned that any increased regulation could stymie the competitiveness of local institutional investors in global private markets.
“If fund managers perceive Australia as less favourable, it may lead to higher fees to attract them or limit access to top-tier managers, which could ultimately impact member return outcomes,” the lobby group wrote in its submission.
The Australian market is currently attracting many of those top-tier managers, such as the $751 billion Apollo Global Management. Apollo deployed $2 billion in private credit in Australia last year. The manager – and the other private asset managers to make submissions – did not cite leaving Australian shores because of potential regulatory change as a risk.
Rather, Apollo suggested Australian regulation could be more aligned with the US “to uplift regulation to meet global standards and avoid a significant overhaul of the Australian regulatory framework”.
The private asset manager listed five areas for improvement:
- Data and transparency.
- Risk spectrum (with regulation focused on private assets with higher return volatility or illiquidity).
- Leverage (with regulation focused on certain areas such as investments with significant mark-to-market collateral requirements or high leverage).
- Interconnections (such as regimes that encourage the use of derivatives).
- Greater oversight of retail access to private markets.
These recommendations are far from controversial given ASIC, by its own admission, lacks basic data about the fast-growing private asset market it regulates. It needs more transparency to do its job.
While private assets have delivered healthy long-term returns for investors, this doesn’t mean there aren’t major risk issues waiting to crystalise during the inevitable next market crisis.
One major asset owner at the Fiduciary Investors Symposium wryly noted that private credit managers were loath to write down their valuations even when loan covenants were breached.
While loan defaults do not automatically equal losses, it does reveal the wide and sometimes troubling disparity of practices across the private market universe.
For example, private equity managers historically take the opposite approach – conservatively valuing their assets, which often leads to a substantial uplift on exit. But this practice also has significant implications for member equity.
Not all funds are managing these risks well, given the inherent (and arguably irresolvable) mismatch between daily unit pricing and infrequent valuations.
It was less than a year ago that APRA found major issues with the industry’s valuation and liquidity management of $500 billion in unlisted assets. More than half of 23 funds were found to not be meeting those specific requirements outlined in SPS 530.
“While the industry remains open to enhancements, ASFA believes that current governance and protection measures in the institutional space are robust,” the industry lobby group wrote in its ASIC submission.
ASFA says the industry has made changes to better meet SPS 530. But until the industry fully complies with current regulatory settings, the greater risk lies not in more regulation, but in the unchecked risks inherent in private assets themselves.
