Wealthy Australians and their advisers are increasingly exploring alternative investments for better returns and diversified portfolios beyond traditional markets.
In recent years, a transformative shift has swept through the global investment arena, compelling Australian investors to reassess their strategies. The once-stalwart stock market, synonymous with enduring growth, is now undergoing an unprecedented contraction, leaving investors in search of diverse opportunities.
Diminished public markets
Over the last two decades, both the UK and the US stock markets have experienced significant contractions. The UK has seen a dwindling number of new listings since the financial crisis, a trend showing no signs of a meaningful recovery. Similarly, the annual average of companies going public in the US has plummeted. This decline directly affects the exposure the stock market offers to the corporate world. Presently, fewer than 15 per cent of US companies with revenues exceeding $100 million are listed.
EQT also foresees a continued decline in the count of Australian companies going public on the stock market in 2024. In November 2023, there were only four new entities listed on the ASX (compared to six during the same period in 2022), while 16 entities delisted (up from 12 for the same period in 2022). Owners of private businesses, typically keen on going public for financial growth, are having second thoughts due to heightened ESG obligations, a surge in shareholder activism, escalated scrutiny from regulatory bodies, and the augmented demands of financial reporting.
These statistics underscore the diminishing proportion of public listings, emphasising the need for Australian investors to explore alternative growth and diversification avenues.
Australia’s IPO landscape
In the domestic market, the ASX has observed a substantial year-on-year decrease in the amount of equity capital raised through IPOs. Specifically, in 2022, the total number of IPOs in Australia dropped by 54 per cent compared to the previous year, with 87 in 2022 as opposed to 191 in 2021. This trend mirrors a broader global phenomenon, as 2022 witnessed a 41 per cent decline in global IPO volumes and a substantial 57 per cent reduction in IPO values compared to the previous year. This sharp decline underscores a notable reluctance among companies to pursue a public listing, reflecting a worldwide trend where the frequency of initial public offerings has reached historically low levels.
Prolonged private status: A global phenomenon
This trend of staying private for longer is not limited to any specific region. Europe, the US, and Australia have all witnessed a decline in the number of public companies. In the US, for example, the median age of companies at IPO has more than doubled over the past decade, largely due to the prevalence of private equity-backed firms.
Public markets now provide exposure to only a fraction of the corporate universe
The steep ascent in the costs and intricacies entailed in transitioning to a publicly-traded entity has emerged as a formidable deterrent for myriad companies contemplating an IPO. The labyrinthine regulatory prerequisites, onerous compliance standards, and the potential for heightened scrutiny from a panoply of stakeholders have compelled firms to deliberate their options with heightened circumspection. Consequently, an increasing number of companies are opting to remain in the private sphere, steering clear of these formidable challenges, while availing themselves of alternative avenues for financial infusion and expansion.
Additionally, the allure of alternative financing avenues, particularly private equity, has become more enticing to companies.
Embracing private markets: Imperative for Australian investors
Given these developments, Australian investors should consider recalibrating their strategies to embrace private assets. Individual investors hold roughly 50 per cent of global assets under management (AUM), yet only 16 per cent in alternative investment funds. Institutional investors have already acknowledged this shift, with over 40 per cent expressing their intent to further increase allocations to private markets. Importantly, this shift is not exclusive to institutional investors; retail investors in Australia are also demonstrating a growing preference for private markets.
Democratising private markets
One of the most significant advancements in this landscape is the emergence of innovative fund structures tailored for individual investors. This democratisation of private markets is a game changer, empowering Australian retail investors to tap into opportunities previously reserved for institutions. At EQT, we’ve introduced EQT Nexus, a tailored approach enabling eligible wholesale clients in Australia to harness the immense potential of private markets. With approximately 50 per cent of global assets under management held by individual investors, this shift may lead to substantial diversification and growth potential.
The contraction of public markets and the concurrent rise of private markets mark a fundamental shift in the investment paradigm. Australian investors who adapt to this new reality and embrace private assets could stand to benefit from a broader spectrum of investment opportunities and the potential for robust growth. As the financial landscape continues to evolve, staying well-informed and remaining adaptable will be pivotal in achieving sustained success in this changing environment.
Martin Donnelly, Sydney-based client relations managing director, EQT