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RBA warns of private equity risks to ASX

By Rhea Nath
4 minute read

The RBA has highlighted the “significant growth” of Australia’s private equity market which is diverting equity capital from the public market and may impact the ASX’s diversification.

The Reserve Bank of Australia (RBA) sees both advantages and drawbacks arising from the growth of Australia’s private equity market, especially as the Australian Securities Exchange (ASX) contends with limited new listings and initial public offerings (IPOs).

The Australian private equity market has witnessed substantial expansion in recent years, fuelled in part by the nation’s economic recovery from pandemic-related disruptions.

According to data from Preqin and AIC 2024, private equity funds, including both domestic and foreign entities focused on investing in Australian companies, managed approximately $66 billion in assets as of June 2023, equivalent to 2.6 per cent of the country’s GDP.

Of this total, about $44 billion was already invested in Australian enterprises, with an additional $22 billion earmarked for future investments. This represents a remarkable 75 per cent increase in nominal assets under management from December 2019 to June 2023, with a notable surge observed in venture capital funds.

Notably, the growth of the private equity market has been propelled not only by strong returns on investment portfolios but also by robust fundraising activities. In 2022 alone, private equity funds focusing on Australia garnered a record-breaking $11.7 billion in capital, constituting 0.5 per cent of the gross domestic product (GDP).

In contrast, the capital raised through IPOs on the public equity market in 2022 amounted to approximately $1 billion, a stark difference compared to the $9.8 billion average (adjusted for inflation to 2022) seen over the prior decade.

Sharing this data in its latest April bulletin published on Thursday, the RBA observed: “Consistent with the growth in private equity funds with a focus on investing in Australian companies, the value of private equity deals involving Australian companies has increased to a record high in recent years. The total value of private equity deals was $57 billion.

“This growth was primarily driven by a small number of large leveraged buyouts, in which private equity firms take on more debt to purchase a controlling stake in an established Australian company.”

The RBA views the ascent of this asset class as posing both potential benefits and risks to economic growth, capital efficiency, and Australia’s $2.7 trillion public market.

“New, innovative businesses and products often seek external capital investments at a time when their growth prospects and earnings potential are highly uncertain. Venture capital firms are among the private equity firms specialised in assessing early-stage funding,” the central bank said.

“Underperforming companies may also be targeted by private equity investment, which can bring expertise and experience to help maximise growth. The threat of takeover, including through buyout by private equity firms, can also discipline existing management to improve company performance.”

However, the RBA remarked, some research suggests the public equity market is more efficient at allocating capital than its private counterpart, partly because unlisted firms face less stringent governance obligations and public reporting.

“Removing companies from public listing lowers transparency and may make it more difficult for investors to compare company and management performance to make informed investment decisions,” it said.

“Heightened levels of private equity buyout activity may reduce the diversification of the public equity market.

“Private buyouts of large companies have removed equity capital from the Australian public equity market at a time when there were limited inflows of new listings and initial public offerings. This has contributed to a greater concentration of the biggest companies in the public equity market, although only to around the average of the past 14 years.”

The ASX’s latest report revealed more than 100 delistings this financial year, as at the end of February 2024, compared with 75 in the prior corresponding period.

The total number of listed entities on the ASX was 2,183, down from 2,289, while the total new capital quoted was $2.5 billion, compared with $1.6 billion previously.

Ultimately, the RBA said the Australian private equity market remains “much smaller” than the public equity market, representing less than 3 per cent of listed equity market capitalisation.