In its latest corporate plan, the Australian Securities and Investments Commission (ASIC) announced it would prioritize a review of the growth of Australia’s “opaque” private markets, with chairman Joe Longo highlighting the increased risk to market integrity as exposure to investors is increasing.

“While Australia’s private markets are smaller in size than our listed equity markets, their opacity poses a huge risk to market integrity, particularly as more investors become exposed,” ASIC’s chairman said on Thursday.

In an InvestorDaily webcast, Andrew McVeigh, managing partner at Remara, endorsed the increased transparency and standardized reporting as “fantastic” for the industry, noting that it will help distinguish between effective and ineffective managers.

“It's a great thing to have more transparency … The main topic for us right now is what are your arrears, where are your charges and what are you getting that you're not disclosing through the PDS, and so on and so forth. So I think that's certainly the theme of the day," McVeigh said during the webcast, exploring the rise in Australian commercial real estate debt (CRED).

"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.”

Joining McVeigh on the webcast, Tom Cranfield, director of investment and risk at Zagga, stressed that despite some vocal critics, the industry's strict compliance measures are likely to lead the regulator to give its standards a positive assessment.

“We have external auditors who audit each of our funds every quarter, who audit our ledger. We have external credit and investment committees with oversight from a party outside the business. We have a regulation from our AFSL that allows us to write a 30 year bank mortgage if we want to. So APRA has already dived deep into us,” Cranfield said.

“We use independent consultants to monitor our loans. We have quantity surveyors; we have third party appraisers. In our investor IMs, they revealed exactly how we make our fees. In our deal-specific IMs, they see exactly what the transition is between the loan manager and what the borrower gets to the investor and what they get.

“I think sometimes maybe people with a louder voice come out and speak their own book against what is the new booming place. If you look at the mess we're working with and the strict nature of the compliance measures we're all putting in place, I think we'll be fine. And I think if the regulator comes in, they'll come to the same conclusion.

Scrutiny of private markets has increased, with both ASIC and the International Monetary Fund (IMF) raising concerns about their growth. IMF warned in his April 2024 Global Financial Stability Report of potential vulnerabilities that could arise from limited supervision of private credit, which is called an "opaque and highly interconnected" segment of the financial system.

Similarly, last month Longo said, "We need to understand better what's going on there because the very nature of private markets is a lack of transparency and data."

Over regulation is a hindrance

Also speaking on the webcast, Nick Raffaelli, co-founder and co-CEO of AltX, supported sensible regulation as a means of raising industry standards and differentiating businesses, while acknowledging that the over-regulation prevalent in Australia can be burdensome.

"Obviously we're encouraging regulation to a reasonable level, not an extreme level, because I think the smaller players don't have the resources to deal with it. So I think that becomes a point of differentiation. And I also think that if you apply it and interpret it wisely, it forces you to raise the standard of your business,” Raffaelli said.

"As we report to APRA every month, like the guys, we report to AUSTRAC every year ... obviously ASIC is there as well ... So it forces us to work at a certain level, but it also becomes a point of differentiation."

Raffaelli added that regulation can help bolster the efforts of established, compliant businesses.

“Sometimes I say, a little flippantly, that in some of the products we offer, if you have some capital, a set of loan documents from your brother-in-law and some ambition, you are our competitor. And we went for a decade, gutting ourselves with about 60 people. So, in a way, it feels a little unfair,” he said.

"If everyone has to work to a certain standard, then hopefully you'll set yourself and the business apart, which I assume you've worked hard to try and establish."

Earlier this month, a global survey revealed that private lending is gaining popularity among institutional investors, with sovereign wealth funds particularly benefiting from new lending opportunities.

Also this month, an analysis of plans to invest capital in alternatives over the next 12 months showed that private credit is a favorite among investors globally, with around half of investors noting that they intend to increase their allocation to the asset class.

The private lending market was worth about $188 billion in Australia last year, according to the latest EY estimates.

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