How private assets are transforming capital markets and super
Super funds and private assets in the spotlight after ASIC release.
On Feb. 26, 2025, the Australian Securities and Investments Commission, or ASIC, released a paper titled “Australia’s evolving capital markets: A discussion paper on the dynamics between public and private markets.” The paper discusses the changing Australian capital markets landscape, focusing on both the rapid growth in the capital allocated to private assets and the influence of Australian superannuation funds on private markets.
The paper highlights that, over the past 10 years, the total value of the Australian public equity and debt markets doubled. In contrast, the value of private capital funds grew by an impressive 161%, comfortably outpacing the growth in the public markets assets.
Retail investors can access private markets via managed investment schemes. In addition, millions of Australians hold private market assets indirectly through investments in their superannuation funds. Superannuation underpins Australians’ financial well-being; it is estimated to represent one fifth of household wealth. The size of superannuation funds influences Australian capital markets and will likely drive further growth in private markets, firmly embedding them as a key driver of the Australian economy.
As private markets grow, ASIC and the Australian Prudential Regulation Authority, or APRA, have been increasing their supervision in this space. In particular, they are focusing on key areas such as governance, valuation practices, liquidity management, management of conflicts of interest, and fair treatment of investors.
There are several key takeaways from ASIC’s paper:
- Public and private markets support one another and are critical to the Australian economy.
- ASIC views the downturns in the volume of initial public offerings and listed entities in Australia as more likely to be cyclical; however, it is worried about the future of public markets.
- Australia's private market growth is significant, albeit from a low base in some asset classes, such as private equity and private credit funds. The drivers of their growth appear to be structural, and they will be increasingly important to the success of capital markets.
- ASIC highlights several key risks of private markets investments that they will focus on:
- Opacity and potentially unfair treatment of investors
- Management of conflicts of interest (for example, misaligned incentives, related-party transactions, and treatment of confidential information)
- Valuation of illiquid assets, which impacts investment entry and exit prices, performance measurement and fees
- Vulnerabilities from leverage (for example, private companies tend to have a higher appetite for leverage than public companies, this contributes to higher risk, especially when combined with an increased cost of borrowing)
- Investment illiquidity - generally, private market investments cannot be realised quickly to meet an investor's liquidity needs.
- Australia's superannuation system is a significant force in Australian capital markets, increasingly driving developments in public and private markets. Its structural influence is profound and enduring.
- ASIC is increasing focus on private credit, given it is a growing asset class globally and locally.
- The importance of access to reliable data on private markets to more accurately assess risk.
Implications on Morningstar's Super Fund Ratings assessment: Trustee governance key
Morningstar Medalist Ratings apply our forward-looking investment strategy analysis, based on three pillars - People, Process and Parent. Morningstar has expanded its coverage and research of superannuation funds in AUD 4 trillion superannuation market, including launching a new enhanced Medalist Rating methodology for super funds in February 2025, which places a greater emphasis on trustee governance and the Parent Pillar in its analysis.
One of our key criteria in assessing a super fund's investment process in the management of unlisted assets. In Morningstar's inaugural 2024 Superannuation Fund landscape paper ("Mergers and Megafunds: The Superannuation Landscape in 2024"), we highlighted the growing size and concentration in Australia's superannuation system. Super funds are Australia's mega-investors, and investment in private assets is a well-established diversification strategy for superannuation funds. It is also a salient example of how many super funds play to their strengths; not only do super funds have long investment horizons, but many funds have robust positive ongoing member inflows, which better enables allocations to less-liquid assets while still being able to effectively manage liquidity risk. For example, unlisted property and infrastructure have long been staples of industry funds.
Allocations to unlisted assets are important to consider from a process point of view because analysis needs to account for risks such as liquidity, valuation, leverage, and potential conflicts of interest. APRA's Prudential Standard SPS530 reflects the growing regulatory drive for improved transparency from super funds in this regard. In our Process assessment, we will evaluate key aspects, including the valuation governance framework, the valuation methodology, the use of independent valuation sources, and the frequency of valuation updates.
Members should be cognisant of the impact of private assets on their fund's liquidity profile. High exposure to private assets, which are typically illiquid, does increase the risk of problems in stressed market conditions, or if changes in regulations permit members to access funds pre-retirement (as was the case at the height of the covid pandemic in 2020).
Case Study: Sydney Airport taken private
In 2022, Sydney Airport was taken private at an enterprise value of around AUD 32 billion by a consortium of investors, which included superannuation funds. This is an example of how large super funds can leverage their scale to capture stakes in highly valuable, "trophy" assets for the benefit of their members.
There are key benefits in investing in major city airports, such as Sydney Airport, and there are several reasons why they are highly attractive for superannuation funds with a long-term investment horizon:
- Airports are critical infrastructure assets that typically generate stable and resilient cash flows.
- They often operate as monopolies within their geographical areas, providing a steady stream of revenue from various sources.
- Unlisted infrastructure assets, like airports, often have revenues linked to inflation, providing a natural hedge against inflation. This is particularly beneficial for superannuation funds with a real-return performance objective aiming to preserve and grow the purchasing power of their members' savings.
Superannuation funds can benefit their members from owning an airport through an unlisted vehicle rather than a listed vehicle in several ways:
- Stability: Unlisted investments often provide more stable and predictable returns compared with listed investments, which can be subject to market volatility.
- Long-term investment horizon: Airports are long-term infrastructure assets that align well with the long-term investment horizons of superannuation funds. Unlisted vehicles typically involve longer holding periods, allowing members to benefit from the compounding effect of returns over time and reducing the need for frequent trading by the super funds.
- Control: Owning an airport through an unlisted vehicle allows super funds to have greater control and more direct influence over the asset, including strategic decisions, governance, and operational management. This can lead to better alignment with the fund's investment objectives and values.
The benefits of holding such investments in an unlisted vehicle structure, combined with strategic importance of airports, make them a compelling investment proposition for superannuation funds seeking long-term, stable returns for their members.
