In August, Australia’s biggest super fund was reported to have written off a $1.1 billion investment in Pluralsight after the latter entered restructuring following a sharp decline amid rising interest rates and increasing market competition.

Speaking to InvestorDaily, AltX co-CEO Nick Raffaelli said this situation reflects the risk of investing in a private business with some level of leverage.

“If the parent company’s earnings are down and borrowing costs are up, as was the case here, that will naturally cause some stress on the business, as appears to have been the case here,” he said.

Raffaelli emphasized that private equity remains a well-established asset class, with large ticket sizes typically required to participate in deals. As a result, investors typically gain access through private equity funds or super funds that are diversified across a range of deals.

"Therefore, the likelihood of retail investors directly losing a lot of money because a deal fails is, in my view, quite small," he said.

"Where there's return, there's risk, and this is probably a testament to that."

He also added that AustralianSuper appeared to be "well diversified" and as such should face no hurdles in absorbing this loss.

This point was previously confirmed to InvestorDaily by AustralianSuper's head of international equities and private equity, Mark Hargraves, who said there would be "no impact on members' future earnings".

Hargraves also reiterated that "the higher risk/return profile for private equity is a feature of the asset class," adding that "we will continue to invest in private equity, venture capital, and also the technology sector as a whole."

Similarly, Alan Greenstein, CEO of Zagga, emphasized that private equity is inherently a risky asset class.

Commenting specifically on AustralianSuper's big loss, Greenstein told InvestorDaily: "The deal was very well supported when it happened."

“I don't think it's necessarily fair to judge AustralianSuper for taking on the write-off. I mean, obviously nobody likes to lose money on a deal, but they certainly weren't the only players in the deal. It was a very well-supported deal when it happened,” he said.

Addressing concerns surrounding the asset class, Greenstein maintains that private equity players understand the risk is high, noting that "when you do get it right, it's extremely right."

"So when you get it wrong, you tend to get it spectacularly wrong."

Greenstein also offered an explanation for why the AustralianSuper situation is attracting close attention, noting that it is because of the availability of "mom and pop money".

"Whether these mum and dads are actually invested in this particular fund that has taken the write-off, or whether they are simply investors in one of the other AustralianSuper funds, it raises the question of whether a manager playing with mum-and-pop money should be investing in this kind of deals and what is the downside to it. I think that's a valid question," he said.

For Pete Robinson, head of investment strategy, fixed income, at Challenger Investment Management, all funds are about taking risks, and when you take risks, some losses are inevitable.

“In reality, all we know is that AustralianSuper invested in Pluralsight's equity and lost money on the trade. Of course, the number is big, but so is their total funds under management, although we don't know how much exposure they have in different options,” he told InvestorDaily.

He emphasized that "we cannot claim that private assets are inherently risky" based on a single transaction. For him, the key takeaway is the importance of governance and transparency.

“Investors attribute the loss of money to an inherent flaw in the product. However, we must consider each deal on its own merits. In the case of the Pluralsight/AustralianSuper deal, there is nothing publicly stated that would affect confidence in the private markets,” Robinson said.

Dealing with opacity

In its latest corporate plan for 2024–28 The Australian Securities and Investments Commission (ASIC) recently announced that a review of the growth of private markets will be a key part of its upcoming activities.

Referring to private markets as opaque, ASIC chairman Joe Longo said: "While Australia's private markets are smaller in size than our listed equity markets, their lack of transparency poses a huge risk to market integrity, particularly when more investors are exposed at risk.'

Commenting on the corporate regulator's announcement, Robinson applauded ASIC's "worthy effort" to do more around assessments, the treatment and disclosure of upfront fees and the management of conflicts of interest.

Similarly, speaking on an InvestorDaily webcast last month, Andrew McVeigh, managing partner at Remara, endorsed the increased transparency and standardized reporting as "fantastic" for the industry, noting that it would help distinguish between effective and ineffective managers.

"I think the ability to be able to sort out the good managers versus the bad managers, a level of transparency and standardized reporting, would be fantastic for the industry and probably very useful for most investors." So our view is that we support ASIC and their efforts to show some transparency in the industry," he said at the time.

Joining him on the webcast, Raffaelli said he supported sensible regulation as a means of raising industry standards and differentiating businesses, but noted that excessive regulation prevalent in Australia could be burdensome.

To hear more from our webcast, click here.