ASIC’s Symposium on Australia’s public and private markets was held at the University of Technology Sydney Broadway campus on 10 June. The following facilitated State of Our Markets panel followed Joe Longo’s remarks.
Calissa Aldridge, Executive Director – Markets, ASIC: Thank you, Chair, for setting the scene for us. Now we’re going to move to our first panel on the state of markets. This discussion comes at a really pivotal time, as we’ve just heard from our Chair. Global competition for capital is intensifying, and markets are under pressure to do more. More capital for climate and energy transition, to fund infrastructure, more access for investors and more resilience in the face of global shifts. At the same time markets are changing, and we’ve just heard that from our Chair. So this panel will walk us through some of these challenges, opportunities and where to next.
So first, I’ll introduce James Thompson from AFR. He’s going to moderate the two sessions this evening, so please [inaudible]. I’d also welcome our four thought leaders who are going to bring a diverse perspective across regulators, investors, market participants and academics. So Joe Longo, Chair of ASIC; Dr Raphael Arndt, CEO of Future Fund; Professor Carole Comerton-Forde from the University of Melbourne; and Guy Fowler, Executive Chairman of Barrenjoey Capital Partners.
James Thomson, AFR, Chanticleer Columnist: Thanks Calissa, and thanks to Joe and the ASIC team for having me tonight. Carole, I want to start with you. You did the big bit of research that sort of set up the ASIC inquiry in many ways, the backbone of the discussion paper. What have you made of the responses from industry? Is there anything in the submissions that you’ve seen that sort of surprised you?
Professor Carole Comerton-Forde, Professor of Finance, University of Melbourne: Yeah, sure. So I think there’s a lot about the submissions that is what you expect. So people have said the health of both public and private markets is critical to the Australian economy. The superannuation funds are a unique and very important part of the market, and that it’s really important that the industry proactively get involved in developing the agenda. So I think those things are all expected.
The thing that surprised me the most was there were lots of submissions saying the issue is regulation. The burden of regulation is too big. But I didn’t see anyone who was able to articulate why that burden has changed in the last two years to be more problematic than it was prior to that.
So if you look at the time series of what’s gone on in the ASX, 2021 was a bonanza year. So the second highest number of listings in Australia ever, so more than 200 companies went public. 2022, also a pretty decent year, more than 100 companies. But then in ’23 and ’24 things fell off a cliff. Less than 50 companies listed across the two. Negative net listings. So what happened in 2023 to make the regulatory burden so big?
The best explanation that I read was from the AICD who talked about this notion of regulatory accumulation. But the regulatory accumulation, the examples that they pointed to, were all regulations that affect both public and private companies. So there seems to be a bit of a disconnect for me, that if regulation is the primary problem, what has changed? Why is that now a problem, when a couple of years ago it wasn’t?
And so I think if we want to find the solution, we need to really understand the problem. And sure, as Joe said, Australian financial markets are very complex. There’s definitely places where things can be simplified and made easier, and the changes announced this morning are one step in that direction. But changing regulation I don’t think is going to solve the problem.
What is different in 2023 and 2024 versus before? The abundance of private capital. So before, companies and directors had choices – sorry, didn’t have a choice. Going to the public market was where you had to go if you wanted to raise a lot of money. Now, there’s lots of choice. You can stay private, you can get as much capital as you need. So I think that’s the big issue.
Thomson: Yeah, the abundance of private capital, and passive capital, and super fund capital. Joe, there was a fair bit of self-interest in some of the submissions. I guess you’d expect that. Lobby groups see a chance to use their favourite stalking horse and push their barrow. But were you happy with the quantity and, I guess, quality of responses you got?
Joe Longo, Chair, ASIC: First, I was very pleased. The Commission was very pleased with the number of submissions, I think over 90. And secondly, not only that, but the quality of them. It’s quite obvious that many of the submissions, some real resources were put into drafting them and thinking them through. So I’m very happy about that.
A couple of other things I’m very happy about is just the level of engagement. OK, a lot of submissions were self-interested. But I think that we should expect that in a liberal capital economy. We didn’t get to where we were today without people acting out of self-interest. It’s the collective self-interest that hopefully leads to the public interest.
But the other thing about the submissions that I really liked was that it confirmed we were asking the right questions about the issues and that, if anything, we’d underestimated the complexity and depth of the private markets. Because one of the issues for us, and has been from day one, is data and transparency. And everyone talks about the private markets like, oh, well, we know what’s going on there. Well, actually, our understanding is pretty intermittent and spotty. So I think that’s a – I was very happy about that with the submissions. And I think a lot of the submissions also very helpfully actually had ideas.
About a year ago, I made it very clear publicly that I was interested, ASIC was interested in actionable ideas. What’s an actionable idea? It’s an idea that’s within ASIC’s gift to make happen. So I was very pleased we were able to make the announcement this morning. That reflects work not only by ASIC, but by thoughtful participants in the market who came up with a proposal that we were able to engage with. And I’m hoping there’ll be more like that.
The only final thing I’ll mention, which I know we’ll come to, James, is I’m very interested in the role of retail participation in the private markets. And as we know, there’s a lot of comfort in the public markets. A lot of Australians sort of understand what’s going on there. But if there’s one big feature of the private markets that I think we should all be paying a lot of attention to, is the direct and indirect interest of retail.
Thomson: We will come back to that Joe, you’re absolutely right. Guy Fowler, thoughtful market participants. I think Joe was just talking about you there. While we’re on the subject, you’ve been campaigning about the IPO mechanisms, rules, framework for some time. Are you pleased with what you’ve seen from ASIC this morning? And is there a little bit more you’d like, further tweaks you’d like to see as well?
Guy Fowler OAM, Co-Executive Chairman, Barrenjoey Capital Partners: I think thoughtful participant only because we’ve been doing it so long. It’s just [inaudible]. But clearly a great step forward. When ASIC said that they wanted actionable ideas and they were going to take action, they meant it, so hats off. Actually, when we were talking about the ideas and pre-vetting, initially that was hard, but it’s been enacted, so that’s fantastic. Clearly a step in the right direction.
I mean, to me there’s two questions, I guess. How can we make Australia a very attractive market to list on for anyone who’s going public? I think we are. We’re a very well-valued market. There’s a large pool of savings, a pool of superannuation supporting the market. We attract good multiples, etc, etc.
So everything we can do to make it easy to list here, shorter IPO periods. There’s some advancements on forecasts, which we talked about as well. We’re seeing Virgin’s basically not going out in the forecast for next year, it’s going out with some guidance statements. It’s a very hard company to forecast, so that’s a good advancement. There’s an impetus to bring other companies, international companies to list in this market, and I think that would be a great initiative. That’s the first one.
I think if you look at the Asian region versus Singapore and [inaudible], etc, etc, I think we are the most attractive market in this region to list, so that’s great. Then there’s a second debate, which is the sort of rise of private money and non-public money. I don’t think regulation is what is driving companies not listing. It is exactly as was just said. If you look 10 years ago, 20 years ago, AirTrunk at $20 billion or whatever it was, they would have had no choice to get that capital in the public markets. Those choices exist now. We just need to make sure that there is a level playing field.
Thomson: So Guy, when we think about – we’re sitting here, the ASX 200 closer to record level, which is incredible given all the turmoil we’ve seen in the last month. As you said, Virgin’s got away, great product, good pricing, clearly. Are we getting too worried about the health of the public markets?
Fowler: Look, I think it goes to say, I am old enough to remember when every private real estate asset was held in unlisted vehicles, and then we had a liquidity crunch in the ’90s, and they all became [inaudible]. It probably goes in cycles. At the moment, there are large amounts of private assets in super funds, because they’re still in a heavy inflow environment. When they start to go to outflow, and it maybe 10 years, 15 years, and there’s a liquidity crunch, a liquidity premium will come back.
The real question to my mind is, in theory, the same asset should trade at a lower cost of capital with liquidity in the public market. It should be the best home for it. Why is capital going to private markets? It’s because some of the constraints that live in the public markets don’t exist there. Whether it’s a longer-term view around returns, whether it’s different alignments for managements, whether it’s different capital structures. We’re not quite apples and apples, and that’s why I think the money is – it’s not apples and apples.
Thomson: Yeah, fair enough. Raph, the Future Fund, of course, gets to choose between apples and oranges every day. You can go public or private or however you want to do that. Can you take us through a little bit about how you see those two options, and if you had the magical marginal dollar, is your preference to invest in public markets or private markets?
Dr Raphael Arndt, CEO, Future Fund: Yeah, absolutely. Thank you. So, funnily enough, my career started in private markets. So people would say I’m biased. I would say if we have a preference, it’s in public markets. And the reason is because we can trade every day. It’s cheaper. Managers are much cheaper. It’s more transparent. So if we could get the same asset in the public or private markets, we’d pick public every day of the week.
So having said that, we do a lot of private market investing. Why? I think I would support what Guy was saying. I don’t think it’s regulation. By the way, I’ve sold a lot of private assets, and when you sell a private asset to a sophisticated buyer, you have to provide forecasts. Then you have a lot of disclaimers attached. Probably longer forecasts than you would in any IPO I’ve ever seen. So I don’t think that’s the issue.
I think it’s really about the time horizon of the end investors in both markets. And the public markets aren’t particularly good places to fund a growth company that has to reinvest in its own business, or acquire businesses to turn around or fix something that’s broken and be patient. The irony, I think, is – and that’s how you create a lot of value as an investor, and that’s why we would expect higher returns in private markets.
The irony is, at least in Australia, the end investors are the same. And I think something like almost half the ASX is super fund money. A lot of the private market managers are getting super fund money in Australia, or people like super funds like us. And so it’s really the mandates that we write for our fund managers, or the way our boards or our governance entities measure success that creates the issue.
Thomson: Fair enough. Carole, you mentioned the importance and the influence of superannuation funds. I mean, I imagine they’re seeing the world similar to the Future Fund and Raph, that not a great difference between public and privates, they just want to go where the opportunity is. But what influence is that having on our public markets, from your view?
Comerton-Forde: So I think super funds are affecting the market in a range of ways, and I think there are some areas of the public markets that we do need to think about. So super funds rightly should be going into private markets and going into private assets, because they have a long term horizon. But super funds are also required to provide daily liquidity for their members. And so if you’re providing daily liquidity, but assets are only getting revalued every quarter, and APRA has suggested there’s some issues around valuation of assets, there’s going to be winners and losers amongst the members of the superannuation funds, and I think that’s something to think about.
In a private market world where it’s purely institutions, where an institution makes an investment in a fund and stays with the fund for the life of the fund, those valuation issues are not there. They’re not a problem. You maybe get problematic valuations over the life of the fund, but at the end of the day, people get the right return. That’s not necessarily the case when you have members coming in and out.
I think one of the other concerns is around performance management. So I think there’s an overemphasis on IRR, and that creates some distortions.
Thomson: And just explain that for the –
Comerton-Forde: So IRR is the internal rate of return, and if the fund assumptions are made that the assets can be reinvested, and therefore if the fund gets some quick wins early on, the IRR gets overstated over the life of the fund. So that’s a challenge.
And I think the other thing that gets overlooked, if you – I sat in many rooms with investment professionals where there’s often statements made that say, we all know private markets outperform public markets, and I don’t think that’s true. The academic evidence says that historically that was true. It’s no longer true. And not only should private markets be outperforming public in a tangible sense, they’re more illiquid and taking on more risk. So they shouldn’t be getting equal returns, they should be getting better returns. And I think some of those issues are not that well understood.
Thomson: Raph, do private markets outperform public markets?
Arndt: Well, if they don’t, we shouldn’t buy them. So I think over time they have, and I agree with Carole, they don’t always. And actually, in about 2018, we formed the view they weren’t, and the expected returns were lower than public markets. So we actually sold a lot of private equity and put that money in equities, which, while it was a bit bumpy through COVID, actually way outperformed for the fund than if we’d held those assets in the private market space.
So I think we’ve got to lose the sort of rules that finance professionals assume, and actually look at the real world and how things are pricing, and the answer is it varies through time.
Thomson: Joe, I reckon this panel’s going really well. Your three fellow panellists have all said we don’t need any more regulation. Regulation’s not the problem. So you can sort of relax, I think.
But just take us through these IPO changes. Not so much exactly what’s in them. I think Guy’s done a really good job there. But the philosophy here. These don’t look to me to require great regulatory intervention. They’re more tweaks. Is there more stuff you can do like that, where tweaking the dials slightly gets you a good result?
Longo: I think [inaudible], kept an open mind on the role of regulation. Just as the Chair of ASIC is doing. Look, I think the real message from this morning, I bumped into some friends during the break, and I just think the real point of this morning is the national regulator is saying we’re open to good ideas and change within our remit. But we’re not alone.
So the ASX is conducting a review of its process around the governance principles. And I think there’s a lot of work I think the ASX could also do to make some adjustments to listings. And I think there’s more work ASIC can do.
Now as far as the role of regulation generally is concerned, we’re conducting a range of surveillances at the moment, particularly in the private credit area. And some of what we’re seeing there is interesting. And we will continue those surveillances, and hope to have something to say about that later this year.
I think where the regulation plays a real role is in facilitating healthy and efficient markets. And I think if there’s one thing that comes out of the panel so far, is an assumption around transparency. So if you’re forming strong views about returns in the private markets over returns in the public markets, well then that assumes you know what’s going on in the private markets. You know what the rates of return are. You know what the risk premium is. You know about liquidity, how often the various funds value their assets, whose money is being invested.
So I think the direction of travel for us at the moment is I think we’re particularly interested in that topic of transparency and data. So far as regulation in general is concerned, we have an entirely open mind about where that goes.
Thomson: Guy, one of the criticisms that came through in several submissions to the discussion paper, and you must hear a lot, is this issue of directors in the public market feeling that they’re constrained by the burden of compliance and regulation. We don’t seem to have a lot of trouble finding directors for our top companies, but at the margins there might be some directors who feel that that burden is too much. What’s your sense of – do you hear that when you’re in boardrooms? Do you think it’s a valid criticism?
Fowler: I guess there’s two things – and interesting to people who have been public and private for the same asset, I’d be very interested in hearing their views.
Look, I think the comments are twofold. Firstly, that there is a large level of scrutiny. You’re sort of on a hiding to nothing. You’re never praised for getting it right, but you can be slammed for getting it wrong. Whether that’s continuous disclosure, trip up, whether the press will be on you very quickly, etc, etc. So there’s quite a burden of expectation which you don’t have to live with in private markets.
Probably the bigger comment which you hear – and that’s a consistent comment, there’s just a lot of process you need to make sure it’s done. The other big comment you hear is that you, almost by nature, you have to become relatively short term in your thinking. It is about the next six months result. It is about pleasing the market, etc, etc. Whereas in a private world, you can take a long term view.
And I’m not sure there’s any regulation that can fix that. That’s just, that’s a fact, that you can have a conversation about where are we going to have this business in 10 years’ time. That’s probably lesser of a focus in a public forum, unfortunately.
Thomson: Well, Guy, there was some regulation that several groups suggested could be removed to perhaps make that burden easier. There was a really big push on the two strikes rule on remuneration reports, for example, that knocking that back would ease the burden on directors. Raph, what do you think? You mentioned earlier that you’ve been on private company boards. Do you feel the pressure is any different or any less, perhaps? It’s probably different, but is it any less?
Arndt: I think the main difference, from my perspective, would be the alignment of shareholders with the management. So I think in a listed company, the management often doesn’t really know who their shareholders are on the day. They might have a general sense. There’s a huge range of shareholders. You talked about passive investors before. Particularly with passive investors, but to a large extent with asset owners like the Future Fund or super funds, some of the proxy voting decisions are separated from the investment decisions internally. And so you do risk, and I think it varies on the execution, but you do risk a misalignment between those sort of decisions and the long term value creation focus.
In private companies, that’s very rarely an issue, because if there’s multiple shareholders, they’ll be aligned around a business plan, and they’ll incentivise the management. So I would encourage listed company boards to be really clear and articulate about their strategies. And we have a number of examples in Australia of listed companies that have said, look, we’re growing, we’re investing in ourselves, we’re turning off the dividend, and you can measure us on the long term value creation. And the shareholder mix usually changes over time. I think that’s fine.
I did want to pick up on one other thing; the regulatory opportunity in Australia, is the way I would put it. So I think it’s a very important time for a regulator like ASIC to be reviewing the industry, whether or not we think there’s a problem. And the reason is, because as you would know if you pick up the newspaper any day, there’s a lot of things happening in the world right now, and large global investors are questioning their exposure to the US. And in the listed markets, the US is somewhere between 60% and 70% of the market cap. Depending on how you measure in the private markets, it’s even more.
And so every investor in private markets in the world has a huge exposure to the US. I won’t say an overweight, because it depends what you measure against. But many, many investors, including us, are thinking hard about whether we should and how we should diversify that exposure. And Australia is right up there in terms of attractive investment destinations around the world right now, alongside parts of Europe and Japan. And the more transparent, the easier the markets are to access, the more consistent the regulation is, the better the chance Australia actually has of attracting this capital to help us fund all the opportunities for our companies.
Thomson: Joe, do you want to respond to that? This panel’s getting better for you.
Longo: I mean, as always, Raph puts it very well. I’ve had the opportunity to do some overseas travel in the last six weeks, and been to Washington and Doha. And the points Raph makes are absolutely correct. Australia is seen as a sophisticated market, with strong rule of law and institutions. We have stability in all of those areas.
And the BlackRocks of this world, the Apollos, they’re very interested in what we’re doing here. They’ve made their time and resources available to ASIC to share their views with us. And so I’m certain that Australia has a real opportunity here, if we play our cards right, to develop our private and public markets in a way that is attractive to investors. There’s definitely an opportunity there.
Thomson: Carole, there are some market dynamics that have changed, particularly in the last few years. You mentioned the rise of private capital, of course, but the rise of passive investing is changing the shape of the market. You can see that in CBA’s share price, it seems to go up endlessly. Talk to us about some of those market dynamics and what they might be doing to the health of the market or otherwise.
Comerton-Forde: Sure, so yeah, markets have become much more concentrated. The Australian market has always been, to some extent, concentrated in banks and mining. The US has become more and more concentrated, particularly in tech. So 40% of the US index is the top 10 companies. So lots of concentration.
I think intuitively people think concentration is bad. And there is academic work that suggests that concentration has a negative effect on markets. So one study that looks at 50 different markets, looking at the markets that are more concentrated in a small number of companies, tend to be countries that have fewer public offerings, have got less efficient capital allocation, less innovation, slower economic growth.
But having said all that, there’s no obvious policy solution to market concentration, and there’s lots of upsides to concentration. So one of the reasons why markets have become concentrated is because there’s a lot of emphasis on market cap weighted indices. And, of course, low-cost indexing has been a phenomenal development for retail investors, and we don’t want to discourage that type of activity.
But what can the market do about ensuring that investors can get low-cost access to a diversified portfolio, but not in a way that this concentration is going to negatively affect the market? In recent years, the concentration has been a positive. If you’re holding the S&P 500, you’ve got very big exposure to the tech sector. And that’s been great. Is that going to continue to be the case? Maybe not.
Should the market be thinking about equal weighted indices and how that might help concentration diminish, particularly if those sectors that are so dominant now are not going to continue to outperform? And how can we maybe have indices that help get deeper into the market? So indices that give people exposure to smaller cap companies in the market in a low-cost, efficient way. So, as I said, I don’t think there’s a regulatory solution to that problem. But hopefully market innovation will help address some of those issues.
Thomson: Guy, one of the trends that’s compounded the passive investing push is the flow of super return. A very similar group of stocks as the super funds try and avoid getting put on the naughty list that the government has with the MySuper test. Is there some distortion in the market there? As someone who’s trying to bring a smaller company to the public markets through a float, is it harder to get attention at that end?
Fowler: Much. I mean, if you think 20 years ago, if you were doing an IPO of a $500 million company, there would be 30 fund managers who would give you $50 million bids. It’s less than a tenth of that [inaudible]. And the impact is very low-fee index money. But also, exactly to your point, the score on the MySuper, which, because of the impact of being blacklisted is so huge, you understand that the behaviour is going to be to track the index. So you’ve got 50% of the market’s superannuation money is basically index trading. And all the managers they give the money to are asked to do that, etc.
I’m not sure what the solution is, but if one of the fundamental tasks of the market is to allocate capital to the best opportunities and be providers of capital to great opportunities, etc, it’s a very efficient way to do it. Because if you’re small, you’re not on the index, no one cares.
Thomson: Does it feel like a bit of a mismatch? This super money’s 30-year money, worrying about a benchmark that’s 12 months?
Fowler: Totally. Those scorecards, those reviews, should be much longer-dated. Because you are forced not to take a longer term view. Which comes back to, what’s the attraction of private markets? You can take a long term view, and not be so worried about your performance this half. It just sort of compounds on itself.
Thomson: Yeah. Raph, does the concentration factor worry you at the Future Fund, or does it create opportunities, dislocations, and other parts of the market you can take advantage of?
Arndt: Well, I should probably disclose we’re not regulated by APRA, we don’t have a performance test, so we can think about what we want to do for our portfolio. The concentration doesn’t worry us, but we have many, many strategies where we just design our own benchmark. So, for example, in Australia, most of our Australian exposure is held not through a market-cap [inaudible] benchmark for that reason. But liquidity is an issue.
So I think it would be good for the industry to think hard about those sort of products. They’re harder to explain, but they do provide other options. I also think over time – there’s plenty of capital in Australia and other places that isn’t regulated as well. So, for example, very publicly, we started a small-cap equity strategy that was only available to us because super money flew from that strategy, they say, because of the benchmark test. So there’s plenty of financial planners, there’s plenty of private capital, high-net-worth capital, and I think the industry could do a better job of marketing those products as well.
Thomson: Joe, I wanted to come back to an issue you raised at the start, the issue we’ve got with retail and wholesale investors and their exposure to various markets. We’ve got retail investors and some of the big private capital players actively trying to go into the retail space, and saying to these mum and dad investors and other retail investors, these are markets you need to be exposed to. They’re exposed to their super funds.
But it creates a real challenge for ASIC, clearly, because we want finance to be inclusive, and as Carole said, the democratisation of public markets has been such a powerful force. But is there dangers in democratising private markets further? Or is that just something we have to live with? I mean, every little misstep gets blamed on you guys, so you’re going to have to wear the heat.
Longo: That’s probably a fair question. I think the starting point here is actually a philosophical one. And from a public policy perspective, we’re a little bit schizophrenic about what we do expect of retail investors. So one school of thought says, oh, we ought to protect those retail investors. If things go wrong, we don’t want them contributing to the collapse of a bank, for example. If we don’t want them losing their money because they’re competing with the big end of town. They need protection. And a lot of our law is directed to that point. The DDO regime, for example, is directed at retail.
But we’re a bit ambivalent about this, because a recent parliamentary committee decided that the retail wholesale test didn’t need adjusting. It hasn’t changed in 20 years. So now there are many, many, many more sophisticated investors or wholesale investors in Australia than there were 20 years ago, merely because the test doesn’t change.
So I think the other data point for me, which I’ve always found very interesting, is Managed Investment Schemes. It doesn’t take much to register one in Australia. And the underlying product can be highly complex, can be toxic. It doesn’t matter. As long as you meet the statutory criteria, we have to recognise the managed investment scheme. And a lot of ASIC’s work is devoted to picking up the pieces.
And finally, there’s, I think, a financial literacy issue. There are many Australians who are encouraged into investments they don’t understand. And so you put all that together, and as a community, we have to decide, are we going to encourage retail investment? If so, then all Australians will have to pick up risk and have an understanding of risk.
Having said all that, I think ASIC’s position is obviously to administer the law as it is. But clearly we want everyone in the community to have a reasonable access to investment opportunities to create wealth. But with that comes risk.
Thomson: A lot of that risk, it seems to me, and comes through really strongly in the submissions, and we’ll talk about this in the private markets panel. Guy, it’s around valuation, and how transparent we are about valuation. I guess the great thing, Guy, about public markets is evaluations there to see every minute of the trading day. The private valuations, there’s not as much transparency and disclosure. And in fact, several of the submissions actively push back against increasing transparency and disclosure.
Is this an advantage that public markets have? If the gap was closed between the transparency around private markets and public markets, it might aid the health of public markets? It might make their comparative advantage a bit more obvious?
Fowler: I think it’s probably an advantage that the private markets have, and it’s often said that it’s less volatile, etc, etc. Now it’s less volatile just because you haven’t valued it. To assume that it hasn’t gone up and/or down in value because the world’s changed and markets have gone up is naive, honestly.
So we do come across situations where something is going to come to market, and this is the market price for it, and it’s open, transparent, and the vendor has said, well, that’s below my mark, I can’t sell it there. So the answer to that is your market might be wrong. So I think there is a gap, an inefficiency between the two.
Thomson: How do you close it?
Fowler: Well, it’s got to be around the focus of the process of valuations. How often they are. If you’re going to hold it at X, and it was X three months ago, but the listed markets moved 10%, you’ve got to have a justification as to why you’re holding it at X. It can’t just be because I want to.
Thomson: Carole, is there regulation here that can help?
Comerton-Forde: I think [inaudible]. We need to have more transparency around the valuation process, and more frequent [inaudible]. I think maybe though, beyond regulation, again, the market can innovate here. So we’ve seen lots of development in the private market space where businesses like Nasdaq Private Markets, and similar businesses in the US, and the UK government has an initiative, called PISCES, which is about bringing trading activity to private markets in controlled circumstances. So having a scenario where you can have a disclosure, and then have some trading in the market. That would give us better insight into how the market perceives the valuation of the business.
And then there’s innovation around that. Some of those businesses like the Nasdaq Private Markets are now building data analytics businesses with valuation tools. So I think that will help address some of these valuation gap issues.
Thomson: We’ve got about five minutes left. We might have time for a question from the floor in a sec if you’ve got one. We’ll come back to you in one sec, sir, we’ll get a microphone to you. Just down in the middle of the aisle, if you can just raise your hand again. Raph, you must see these valuation challenges every day. Do you push hard? Do you push the private capital guys harder on valuations? Do they need to be pushed harder?
Arndt: I think we need to sort of go to why we’re doing a valuation. So I think for our purpose, we do adjust our internal valuations with significant market moves to make sure we’re not over or under hedged or over or under risked. So we would agree that quarterly marks aren’t going to tell you what your asset is worth today. But on the other hand, no one’s moving in and out of the Future Fund every day, so it doesn’t really matter.
So I actually think the valuation issue is more around what are the end products being sold to investors, and are they matched? If you go into a private fund and you own it for 12 years, and at the end the manager sells out all the assets, does it really matter what the value – if they were a bit wrong on the way through? Not so much. If you’re offering daily switching, or there’s a huge trend at the moment in the US where there’s ETFs being put up of private assets, you have to have a solution- It’s basically an equity question.
And I think there are platforms being bought and ways that the market is trying to evolve, which is a much better solution than regulation, frankly, to allow liquidity in private market exposures, I’ll call it, for any type of investor. And as the industry matures, particularly here in Australia, as Guy said, the super funds turn to outflow, the market’s going to drive that outcome anyway.
Thomson: Sir, in the middle there.
Question: Thank you very much. John Peterson from Peterson Research. My background; I spent 45 years in the investment industry, mainly focused on superannuation. A couple of observations and a question for Mr Longo, if I can.
Firstly, I’ve observed that all of the private capital funds discussed in the discussion paper only exist with the application of active management or investment management skills in their management and selection. So that’s a pretty key part to the overall discussion. Question 8 asked about existing regulatory settings, and I guess that falls under the current state of the markets. And I’ll speak here from the point of view of superannuation funds, which are obviously fairly significant.
A piece in the document on page 20 was a very favourable reference to the Vanguard marketing material based on S&P’s [inaudible], which basically asserted that active managers underperform indexes. If this assertion were actually applicable to superannuation funds, then almost all non-indexed superannuation funds would have to underperform the index over a long 10-year period. And therefore, all superannuation funds should fail the performance test.
Thomson: Provided they’re just in public markets, but they’re not.
Question: Well, if they make active decisions, they’re presumably paying fees which reduce return, which is the basic premise of Vanguard. In fact, in the 2024 performance test, 100% of 647 trustee-directed products, including all of the MySuper funds, passed the performance test. Now, my maths isn’t all that great, but if the probability is you’re going to fail, based on the Vanguard view, and 100% passed, then the probability of that occurring is zero.
There are a few other things, like the performance of Australian in Hostplus Super’s active products versus their index, which also show that over the long term, superannuation funds add value from active management. We therefore have proof from Australian investors that the Vanguard argument is not applicable to sophisticated institutional investors, who regularly demonstrate significant value add after investment management fees.
Falling now solidly into ASIC’s area, the RG97 is based on the Vanguard argument. RG97 treats investment management fees as a cost, not a price of accessing manager skill, and this is reflected in the Consumer Advisory Warning. This has significantly impacted superannuation funds’ investment decisions, to the cost of many billions of dollars in lost revenue and returns each year. As in my paper, my conservative estimate is more than $6 billion per year of lost earnings to superannuation funds.
These are all simple statements of facts. Do you accept, therefore, that RG97 is not fit for purpose to support efficient capital raising through confidence in private and public markets, and should be corrected before any further policy related to private investments are enacted?
Thomson: Joe, I think that one’s for you.
Longo: If you don’t mind me asking, did you make a submission?
Question: Yes, I did. It’s published.
Longo: And the points you’ve made in your question were made in that submission?
Question: Sorry?
Longo: The points and observations you’ve just shared with this group were made in that submission?
Question: Yes, they have been.
Longo: Then please forgive me; I’ll be responding to your submission. I’m not going to try and respond to what was obviously a very carefully thought through series of observations. I wouldn’t be giving it proper attention to try and respond to you now. My team is here. I undertake to respond to you.
Thomson: Carole’s looking like she’d like to – no, no. All right. I’m going to bring it to a close with a question, same question for all the panellists. You can even have a go, Joe. Imagine you’re Joe Longo for a day. Debonair, sophisticated, all that sort of thing. What’s the tweak that you would make to public markets so they’re healthier in five to seven years’ time? Is there a single thing that you would just adjust a little bit to make the capital markets, which you’ve heard are pretty attractive already, even healthier? Who wants to go first? Guy?
Fowler: Look, this could be a complete cop-out. Look, if there were a silver bullet, I suspect we would have taken it already.
Thomson: But we found one today with the IPOs, a little change.
Fowler: Correct. So the advice would be more of the same. Preparedness to listen. Preparedness to act. Preparedness to be open-minded as to what are the things that we can do to make this market one of the most attractive in the world. It already is. There’s a large pool of capital, etc, etc. We can make it better. We can make IPOs faster still. We can do all those sorts of things. The advice is to keep doing what you’re doing, which is to have a genuinely open mind to have the conversation.
Thomson: And that is a cop-out. You’re right.
Fowler: It is a cop-out. Because there’s no single thing there. So if you did this, we’re going to have 300 IPOs next year.
Thomson: Let me ask it a different way. Having had a bit of success on the IPO front, is there another topic you’d like to raise with Joe?
Fowler: One that does genuinely worry me, and it goes to the question, is the short termism and index focus of a huge pool of money in our market. Whether it’s index funds, passive funds, or super acting the same way, effectively. I’m just not sure long term that is what the market is intended to do as a capital allocator. It’s great if you’re putting money in there for 30 years and you want the cheapest fees. But it’s not a wonderful market to put it on.
Thomson: Fair enough. Carole?
Comerton-Forde: I’m going to go a little bit tangential with the conversation we’ve been having. All of our discussion has been about the equities market. But let’s not neglect the corporate bond market. So the Australian corporate bond market is pretty small by world standards, and could be bigger and better. I think one very simple change is to make that market more transparent. Definitely post-trade transparent, maybe pre-trade transparent too.
The US made that change more than 20 years ago, and there’s a strong body of academic research that shows that that led to improvements in the liquidity in the market, and led to reductions in the cost of trading in the corporate bond market. And some of my own work showed that it also led to reductions in the cost of debt capital for companies. So if you’re an issuer in Australia wanting to issue corporate bonds, you should be saying, why is this market not transparent? Because that will reduce my cost of raising capital.
Thomson: Thanks, Carole. Raph?
Arndt: So I certainly wouldn’t be advocating for more regulation of public markets. I think that’s clear in the submissions. Again, I think Australia’s pretty good from a world point of view. And I think better, more informed people than me have made suggestions about areas where we could look at to reduce that.
As an investor, what I would be saying is people like us need to be encouraging listed company boards and management to articulate their long term value creation strategies, and have the conviction that the market will back them to drive that value, and not take the short term cop-outs. And so I’d encourage – some of our companies do that already. A lot don’t. So I would just encourage all market participants to engage in that. The investors can then decide for themselves whether that’s a suitable company to invest in.
Thomson: Guy?
Fowler: Can I just add one little story to this? There’s a company in the States, there’s a company called TransDigm. So TransDigm pitches itself as a private equity returns with liquidity. It has gearing at seven times, most people would sort of say once you get above three, we’re really nervous. And it heavily incentivises its management through option packages. Underpays it in cash. It says if you deliver great returns over 10 years, you’re going to make a lot of money.
That is the best performing company in the US over 25 years. And they’ve pitched themselves as exactly that. If you’re here for the next quarter, go away. If you’re here for 10 years and you’re prepared to live with these sort of parameters, these settings, we’re a great investment. And it would be great to see companies here sort of take that leap of faith.
Thomson: Yep. And not get knocked down by Communists like us, I guess, in the media. Joe, you’re Joe Longo every day. You don’t necessarily have to tell us what’s coming next. But out of what you’ve heard tonight, perhaps, I mean, does it give you a bit of guidance as to where the Q3 public markets paper is going to go?
Longo: It gives me a lot more than guidance. It gives me a lot of hope and optimism that regulation isn’t the problem. I mean, I think if one thing history tells us, is that markets are constantly evolving, they’re organic, they’re affected by a wide range of things. In the humble world of ASIC, what we’ve always said from day one is give me an actionable idea, and we’ll do what we can to execute it. And this morning was a modest, but I think significant step in that direction. So that’s my first point. There are two or three ideas that have come through in the submissions that we’re considering at the moment. And we’ll see whether we can action those.
I’ve mentioned the ASX. I think the ASX governance principles are obviously now getting a lot of attention as to whether they remain fit for purpose in the future. And I commend the ASX for the review they’re doing of those. But there are other aspects of life as a public company director that are outside ASIC’s control that may very well need some attention.
But the bottom line for me from tonight is that we have to be very careful as a regulator to not intervene in ways that could lead to unintended consequences. We have to be very clear as to what problem we’re solving. And I think the one thing that I think we will almost certainly be recommending later in the year is reforms around data and transparency in the private market. Exactly how we pull that off, whether that’s driven by the market or through some other standard setting, or whatever. But I think there is room for work to be done there.
Thomson: Ladies and gentlemen, will you please thank our fantastic panel.
