Amid growing concern about lurking risks in the private credit sector, global securities regulators are undertaking work to address some of the issues raised by the fast growth, and increasing presence of retail investors, in illiquid private investment markets.
Speaking at the Ontario Securities Commission’s (OSC) annual policy conference in Toronto, Rodrigo Buenaventura, secretary general at the International Organization of Securities Commissions (IOSCO), noted that, while the private equity and private credit segments are still relatively small in the context of the global financial markets, the evolving role of these markets makes them a key issue for regulators.
“The point is not that private markets are suddenly larger than everything else, they are not. The point is the pace of growth, the interconnection with the rest of the financial system, and the changing investor base,” he said.
In particular, retail investors are increasingly participating in these markets — which is raising the need for increased transparency, and potentially, advice.
“Many jurisdictions recognize that preventing retail investors from gaining exposure to private assets is not sensible,” he said. “But most recognize also that we need certain tools to avoid misunderstandings of the liquidity profile of those products, and to ensure sufficient loss-bearing capacity and risk awareness.”
One safeguard that’s under consideration, he noted, is whether there needs to be a role for professional advisors to help protect investors.
“We are currently launching work on this,” he said — noting that there will be a public consultation in this area. IOSCO is also working to develop a set of high-level recommendations focused on valuation practices at investment funds and hedge funds.
The group issued a consultation paper on fund valuation practices late last year, and is aiming to publish final recommendations in the months ahead.
“Open-ended funds increasingly hold less-liquid and illiquid assets, including private market exposures, and more retail investors now hold these exposures through fund structures. In times of volatility, valuations become harder… and more important,” he noted.
And, while the recent concerns about the risks lurking in private markets is capturing policymakers’ attention once again, this is an area where regulators have already made a mark — as evidenced by the recent use of redemption gates by private credit funds.
“We have seen instances of tension through the operation of gates, which, I would like to remind, are a feature, not a bug,” he said. “IOSCO called on asset managers long ago to develop mechanisms like these, to adjust the liquidity profile of assets to the withdrawals that a fund could face.”