What would protect investors in private market funds?
Reacting to ASIC’s public and private markets discussion paper, research houses BondAdviser and SQM Research have detailed how they believe investors can be better protected from the risks of these funds.
Research house BondAdviser believes financial advice and investor education is necessary if retail investors wish to invest in private market products, while SQM Research would like to see improved disclosure.
In response to ASIC’s discussion paper on public and private markets released in February, the research houses shared their thoughts on Australia’s evolving market and increased use of private market funds.
Assets under management in private credit funds rose from $0.6 billion in 2014 to $2.8 billion in 2024, a rise of 240 per cent over the decade. This included assets from retail investors who invested in a managed investment scheme where ASIC noted some private capital funds were reducing their buy-in to as little as $2,000 or distributing the vehicles through investment platforms.
One opinion presented by BondAdviser was the need for investor education on matters such as risk reporting, robust stress testing and liability management which can have characteristics unique to private markets. The research house first began rating alternative and private debt offerings back in 2017.
Nicholas Yaxley, managing director of BondAdviser, said: “Many existing providers provide sound education practices, but some of these topics can be complicated and require a high level of financial literacy. It would be reasonable to suggest that not all retail investors could assess all the risks on a standalone basis and would value specialised advice.
“Untested products are an inherent risk given the fund in question is yet to season through challenging macroeconomic conditions. As a result, third-party research is crucial to give retail investors the proper due diligence required to assess potential investor opportunities, clearly and objectively. This herein lies the core risk in our opinion – the combination of a lack of necessary information together with a lack of investor education.”
Money Management previously covered how advisers are relying heavily on business development managers (BDMs) and investment specialists for education in order to understand the technical products.
“Where there are good BDMs, you can then gain a better understanding of what’s actually happening in the fund and the reasoning for it. Whereas with funds that don’t have BDM access, it’s very difficult to work out what’s going on and why, and then be able to help us and our clients make an informed decision about what to do,” shared Andrew Saikal-Skea, adviser and founder of Saikal-Skea Independent Financial Advice.
BondAdviser also attributed the demand for private markets products to the lack of alternative income-like investment opportunities available which is likely to be exacerbated further by the phasing out of AT1 bank hybrid offering. It also flagged the high cost of listing a fund on the ASX as a factor fuelling an increase in private offerings instead.
“While a greater investment opportunity set for retail investors would be ideal, the cost burden of launching products onto the ASX (including debt securities) has historically hindered any progress,” he said.
“This suggests private debt will remain a core component of retail investor portfolios in the absence of an overhaul of ASX-listing rules.”
For SQM Research, which has rated private credit funds since 2008, it proposed transparency measures to help retail investors understand the complexity of the product. Investors and research houses alike were often unclear on the real, underlying liquidity of a managed fund, it said, while disclosure on lending practices was also lacking.
“Through the review of both retail and wholesale orientated funds, SQM Research has observed (on balance) a lower level of disclosure on information memorandums, the lower level of disclosure in the form of fee disclosure, risk parameters, target asset allocations, etc.
“Notwithstanding our understanding of the limits to which ASIC can regulate the wholesale funds sector, we would propose regulation/guidelines that require all managers to have a minimum level of product disclosure no matter whether the product offering is retail or wholesale.”
Earlier this year, SQM put the private credit sector “on alert” as it was concerned about the high volume of launches, especially those by newer managers without an established track record or with a dubious marketing strategy.
The alert meant SQM was increasing its active monitoring of the sector and placing a greater emphasis on governance and increased due diligence screening of the funds.
It has current ratings on 70 private credit funds covering both retail and wholesale.
AUTHOR
Laura Dew
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