Once upon a time, like many who had walked the well-trodden path before him, Robin Khuda would have turned to the Australian Securities Exchange if he wanted to grow his data centre company AirTrunk.

He would have found sophisticated investors, alongside mums and dads, to inject capital. He would have made regular disclosures to the market, and he would have opened his accounts for the world to see his rags-to-riches tale.

But today, fewer than a handful will share in the spoils of AirTrunk’s mega success after Blackstone, the world’s largest asset manager, acquired it for $24 billion in a private deal last year. The rest of us didn’t get a chance to even peek into AirTrunk’s books and the Australian corporate regulator wants to understand why.

Why was a blockbuster capital raise that would have been ordinarily sought via a public float conducted in the private market? And what does it mean for the future of our financial markets?

Australia’s financial markets are undergoing a massive transformation, which potentially puts at risk the country’s economic stability, the retirement savings of workers, and our transition to a renewable energy future.

But we have no idea what’s really going on because, unlike other countries around the world, this transformation is cloaked in “opacity and conflict”.

Investors chasing outsized returns and looking to diversify their investment portfolios beyond traditional shares are turning to the private markets, in a seismic shift that regulators – including the International Monetary Fund – warn potentially poses a significant risk to our financial system.

Now, the Australian Securities and Investments Commission (ASIC) wants more information and data to better understand the risks posed by private markets and how to regulate them. On Wednesday, it released a discussion paper that chair Joe Longo describes as the most important piece of proactive work the regulator has undertaken in recent years.

“Why have listed entity numbers been in decline, both in Australia and key international markets?” Longo ponders in the report.

“Will the next financial crisis originate in private markets? What issues facing directors need to be further examined? Superannuation plays a crucial role in securing our financial wellbeing on retirement. How is the growing significance of superannuation in Australia’s economy influencing our markets?”

Investors – especially Australia’s $4 trillion superannuation industry – are becoming increasingly seduced by private markets, which include venture capital, private equity and private credit (or debt), as they see better returns than they otherwise would have through public markets.

The Australian Investment Council, the national peak body for the sector, says returns from private equity and venture outperformed the ASX300 by more than double in the decade to June 30, 2024. It released fresh statistics showing private markets collectively managed $69 billion of assets in Australia, contributed to 3 per cent of the national economy and backed more than 1100 businesses.

“Private capital drives economic growth by modernising heritage industries and investing in new areas of competitive advantage,” says the council’s chief executive, Navleen Prasad. “The ability of businesses to stay private to operate efficiently with a lower regulatory burden is viewed as increasingly important in this context.”

Some of the largest transactions in Australia over the past five years have been conducted in private, according to an analysis by Preqin. Block Inc acquired Afterpay for $US21.65 billion ($34.1 billion) in January 2022, while big players in the superannuation industry – IFM Investors, AustralianSuper and Australian Retirement Trust – and Global Infrastructure Partners injected $US24 billion of private capital into Sydney Airport in late 2021.

The largest deal in Australia last year was not the flashy float of Mexican fast food chain Guzman y Gomez or the merger between Sigma Healthcare and Chemist Warehouse, but Blackstone’s acquisition of AirTrunk for $US15.7 billion.

Khuda’s data centre company reportedly mooted an ASX float just a year earlier for $10 billion – highlighting the lure of private capital for fast-growing businesses, especially in artificial intelligence and renewable energy, which will need “patient capital” over an extended period as it takes considerable time to generate profit and achieve positive cash flow.

Given private markets have grown so fast – albeit from a low base – and coupled with the multi-year drought for initial public offerings (IPOs), ASIC is now spooked.

While total Australian IPO transactions climbed to $3.2 billion last year, overall activity for new listings was significantly below the 10-year annual average of $5.8 billion. The number of stocks and funds listed on ASX – just under 2000 and valued at $3 trillion – is the lowest since 2006 and 75 less than 2023, with surging inflation and high borrowing costs pushing companies seeking capital away from a public float.

The story of changing dynamics in public and private markets is not uniquely Australian, it is a story unfolding in many comparable countries

ASIC Commissioner Simone Constant

“The story of changing dynamics in public and private markets is not uniquely Australian, it is a story unfolding in many comparable countries,” ASIC commissioner Simone Constant says. “However, at least one key element means the story could unfold differently than elsewhere, and that is our superannuation sector.”

The financial and voting force of the super sector, whose assets will surpass the market capitalisation of the ASX this year, can now distort capital markets and poses an increasingly greater risk to Australia’s financial stability.

Today, super funds own about 38 per cent of the ASX, and within five years, that will rise to 41 per cent, according to research firm Rainmaker. As the sector chases growth and bigger returns, they will increasingly turn to private markets, further fuelling their growth.

But the “opacity, conflict, valuation uncertainty, illiquidity and leverage” of private markets, as well as the lack of regulatory oversight and data collection, means ASIC is finding it difficult to ascertain if it should be worried.

“[Australia] is out of step with some of our regulatory peers around the data we get, so it’s important that we fill that gap where you need to look at these issues holistically, and super just has a significant role to play in markets,” Constant says.

“So we’re not just thinking about that investment privately, but also the implications on the public market as super continues to grow.”

Superannuation funds allocate between 0 per cent and 38 per cent of their total assets to private markets, according to APRA. AustralianSuper and Australian Retirement Trust – the country’s two largest super funds – have invested about a quarter of their assets into private markets.

If IPOs are down – but capital needs to be deployed somewhere – institutional investors would naturally turn overseas or to unlisted assets, says Mary Delahunty, the chief executive of the Association of Superannuation Funds Australia.

“Given the long-term investment horizon of super funds, they do take advantage of that sort of investment return premiums that attach to unlisted investments,” Delahunty says.

“It’s sort of natural that private markets have been and are a growing focus of attention, and then we’ve also got funds obviously looking to broaden their investment portfolios beyond the market for diversification reasons, and they enter private markets.”

Perhaps the biggest area of concern for ASIC is the booming private credit space, often seen as the wild west, with the Big Four banks increasingly raising the alarm and calling for a regulatory crackdown to bring them into line with the banks.

Private credit promises strong returns, but its loans to high-risk sectors effectively abandoned by traditional lenders after the global financial crisis and lack of transparency have caught the attention of the regulator.

Although it’s not yet “systemically important” to the Australian economy, financing from private lenders is at historically high levels.

“Some commentators have speculated that it will be the source of the next financial crisis,” Constant says. “We, at ASIC, anticipate there will be more failures in some private credit investments, and Australian investors will lose money. That’s why ASIC is increasing its focus on private credit – not to constrain participation and opportunity, but with a view to being well-informed.”

Blue Owl, an asset manager listed on the New York Stock Exchange, has recently expanded its operations to Australia to capitalise on the growing momentum for private capital investment and entice super fund managers.

Managing director Alicia Gregory, who was most recently the deputy chief investment officer at Australia’s sovereign wealth fund, Future Fund, is confident Australian investors will recognise the opportunities the United States has handsomely benefited from.

“In the US, 87 per cent of all businesses with $85 million of revenue and above are still private, so this ability to access important parts of the economy, especially … as public markets continue to shrink,” Gregory said.

“And as you look through to what is in the public market and the Nasdaq, many of those businesses have started their life with private market backing. And the importance of the private market funding to bring those businesses and ideas to life when they’re in the early stage is really, really important.”

Longo is now tasked with striking that balance between regulation that protects financial stability without hindering innovation and productivity – an issue he says he is deeply thinking about.

“There’s no doubt there’s disquiet in the boardroom about compliance burden, particularly for public companies, and the expectations for director … so I think that that’s something we all have to acknowledge there is a concern,” the ASIC chair says.

“I wouldn’t want to overstate it, though. I think there’s a range of considerations that drive people to one market or the other … ASIC’s interest is integrity and standards. We expect high standards of transparency, disclosure and fair dealing in private markets.”

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