In the world of high finance, everyone, it seems, is ducking for cover.
Avoiding scrutiny and laying low, once a preoccupation of the underworld, has gone mainstream and increasing amounts of our investment savings are moving into the private realm.
The number of companies on our stock exchanges is declining, as big, privately run funds take over established companies and increasingly provide capital for new startups.
Even when it comes to borrowing, there is a growing trend to avoid the middleman by bypassing the banks in favour of raising money directly from well-healed lenders.
While public investment markets such as stock exchanges still tower over private players, and our big banks dominate the lending landscape, the shifts are unmistakable.
That is causing our regulators some concern.
Publicly listed companies, including those trading on the ASX, must comply with disclosure requirements. (ABC News: John Gunn)
ASIC looking for answers
Transparency is a cornerstone of efficient markets, particularly when it comes to debt, and Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC), has begun looking for potential flashpoints caused by this emerging trend.
After calling for submissions last July, it has published a discussion paper and hopes to come up with a framework on how to deal with these changes.
According to ASIC chair Joe Longo, key risks around conflicts of interest, uncertainty over valuations, liquidity and debt levels are emerging as private financing becomes more prominent.
But, given it is so far mostly well-funded investors participating in this trend, what — if anything — should be done?
“The critical point is understanding whether there is a need for intervention …” he says.
“Whether it is for ASIC or another regulator to consider, or whether we leave the market and wholesale investors to their own devices.”
That last option looks increasingly unlikely.
Private investment is one thing, but when it comes to credit, lending and banking, the capacity for calamity and chaos when things go wrong was on full display during the global financial crisis.
And that has Mr Longo concerned about what might be building.
“The private credit market does not appear to be systemically important in Australia, but failures are on the horizon,” he says.
“At current volumes, it is untested by prior crises — regulators need information to consider the risks and plan responses.”
ASIC commissioner Simone Constant, executive director of markets Calissa Aldridge and chair Joe Longo. (Supplied:ASIC)
What is behind the trend of going private?
So far, little work has been done internationally to investigate the risks associated with this retreat from public corporate life.
The United Kingdom and Singapore have both taken a cursory look at the trend but have done little to address the challenges that may evolve.
For years, company directors have complained about the increasing burden of complying with the myriad laws and regulations involved in running public companies.
But every time there is a systemic failure in financial markets, investors inevitably clamour for tighter regulation.
The furore around the collapse of Storm Financial, a private firm which was used by the broader banking industry to fleece investors, inevitably spilt over into calls for reforms around financial advice, and spurred the royal commission into banking misconduct.
According to the ASIC discussion paper, the disclosure principles that underpin public company regulations also apply to private companies.
But given private equity firms attract cash from professional and wholesale investors, they are more lightly regulated.
ASX in decline
The rise of private equity has been partly responsible for a 4 per cent decline in the number of companies on the Australian Securities Exchange during the past decade.
The value of equity raised has plunged 82 per cent.
Compare that with the 161 per cent lift in assets under management by private capital funds during the same period.
The number of companies listed on the ASX has declined by 4 per cent over the past decade. (Reuters: David Gray)
This is not a purely Australian phenomenon — it has been a trend that has been underway in the United States since the 1990s and for more than 15 years in the UK, where it accelerated in the aftermath of the global financial crisis.
In fact, Australia has been slow to the party.
That may not remain the case in the future — a unique feature of our economy revolves around our national savings.
Australia’s superannuation system is now around the fifth-biggest in the world, even though our population accounts for a little over 1 per cent of the global total.
With more than $4 trillion in the system, our biggest superannuation funds have been hard-pressed to find enough alternatives to help diversify their investment exposure.
For years, in addition to listed companies, they have actively invested cash in private equity and venture capital firms looking for higher returns.
ASIC has identified that interplay between our national savings pool and the shift towards private markets as a factor that needs to be taken into account as it begins its deliberations.
