Greater regulatory scrutiny of private capital markets is a “positive development” that will promote longer-term growth, according to S&P Global Ratings.
Private capital markets assets under management now exceed $9tn (£6.6tn) globally, according to the ratings agency’s research, with an additional $3tn raised but undeployed.
However, the sector’s rapid growth has attracted attention from watchdogs worldwide, particularly due to a lack of transparency compared to public markets.
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S&P’s report highlighted recent regulatory actions aimed at private capital funds, including the Financial Stability Board’s consultation on leverage in the non-bank financial intermediation sector in the US; new EU rules on alternative investment funds; and market consultations by regulators in the UK, Singapore, Australia and Canada, with a focus on retail participation and fund governance.
“Fast growth in relatively opaque private capital markets has raised regulatory concerns over risks and investor protection,” said Gavin Gunning, sector lead for Asia-Pacific financial institution ratings at S&P Global Ratings. “Better transparency, oversight and reporting could strengthen confidence in these markets and head off potential problems.”
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Private capital markets tend to be less regulated than banks, particularly after the 2008 financial crisis which sparked increased oversight of the latter.
The growth of retail participation in private markets has raised concerns that individuals may not have sufficient understanding of their investments, including the risks involved and lower levels of liquidity.
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“Public authorities face a conundrum,” said Thierry Grunspan, credit analysis director for financial institutions ratings in the US. “They want to expand access to high-return private markets to investors – including retail end-user investors. But without the necessary disclosure, they could be exposed to risks they don’t fully understand.”
S&P said it expects regulators to strike a balance between establishing an appropriate level of disclosure and other safeguards for investors, while at the same time allowing a free flow of capital where there is market appetite for alternate assets funded by investors typically looking for higher returns.
