A research report, issued in conjunction with a discussion paper that ASIC chair Joe Longo described as one of its “most important pieces of proactive work”, has warned of the risks associated with the shift from public to private markets.
The report, prepared by Melbourne University researcher Dr Carole Comerton-Forde for ASIC and published on Wednesday, paints a fairly grim picture of the state of the country’s equity market but suggests that the narrative of a structural decline is likely overstated.
On 31 December, the ASX had 1,989 domestic and foreign equity issuers listed with a total market capitalisation of $3 trillion, but in the two years since December 2022, the number of companies has fallen by 145.
This decline was due to both fewer new listings (66) and larger numbers of delistings (211), and while neither level is “unprecedented”, Comerton-Forde’s report highlights that such a high ratio of delistings to listings had only previously been observed in the early 1990s.
“We can’t be complacent about the future of Australia’s public equity markets,” ASIC chair Joe Longo said on the matter.
“While history tells us that the current downturn in Australian IPOs and public companies is likely cyclical, deterioration in the quality, diversity and depth of public companies would have significant adverse effects on the economy and on investors’ participation in it.
“While we don’t see regulatory settings as the dominant factor here, there may be opportunities to adjust in order to improve the attractiveness of our markets.”
According to Comerton-Forde’s report, ASX market capitalisation relative to global market capitalisation fell from 2.1 per cent in 2013 to 1.6 per cent in 2023, and ASX market capitalisation to gross domestic product (GDP) fell from a peak of 140 per cent in 2006 to 103 per cent in 2023.
“More troubling than the decline in the number of listings is the longer-term decline in the ASX market capitalisation relative to world market capitalisation, and the stagnation in market capitalisation relative to GDP,” the researcher’s report reads.
It also highlights that while the decline in the public equity market is not uniquely Australian, the role played by the country’s superannuation sector is an important factor to consider, particularly as the sector becomes a key player in private asset markets.
“The largest super funds allocate nearly a quarter of their assets to private markets and have publicly stated plans to allocate more assets to private markets in the future,” the report reads.
Comerton-Forde also raised the issue of market concentration, noting that much like the US market, the Australian public equity market is highly concentrated.
As at December 2024, the 10 largest companies accounted for approximately 40 per cent of the total market capitalisation.
While this is “high” by world standards, the report highlighted that concentration is lower than it was at the end of 2014 when it was 45 per cent for the top 10 companies but is higher than the lows of 34 per cent observed in 2021.
Moreover, the researcher pointed out that the ASX has always been characterised by high levels of industry concentration, with the financial and materials sectors emerging as dominant industries in the economy.
In its own paper, which is informed by Comerton-Forde’s report, ASIC placed the onus on superannuation funds, noting that another influence on the concentration of listed equity markets in Australia, besides index investing, is APRA-regulated superannuation funds, which account for just shy of one-quarter of ASX market capitalisation.
It added that “some stakeholders” have identified the convergence of the concentration risks of index funds and superannuation funds as a “potential risk” that “warrants deeper consideration”.
Ultimately, in concluding her research, Comerton-Forde said she did not find evidence to support the claims that the Australian public market is in structural decline.
“However, there is reason to carefully watch the developments in both the private and public markets and to dig further into the reasons for the recent trends that have been observed in Australia,” she said.
The researcher pointed to data suggesting that the regulatory burden and explicit costs of being public in Australia are much lower than for public companies in the US, adding that it is therefore “not likely” to be the primary driver of companies staying private.
Instead, she highlighted the trade-offs that companies face in deciding to go public appear to have altered as private capital has become more readily available.
“Today, it is easier for companies to gain access to private capital,” she said.
ASX welcomes ASIC paper
The ASX welcomed the discussion paper and public consultation in a statement on Wednesday.
James Posnett, ASX general manager for listings, said: “We welcome the discussion paper and public consultation that ASIC has announced today. Given the fundamental role of capital markets to our economy, they should be regularly reviewed.
“Both public and private markets are independently important, but should also be complementary to each other.”
Posnett added he supports the view that public markets activity, particularly for new listings, is cyclical.
“We’ve seen early momentum in a recovery for new listings, but as an operator of public markets we support a review of changing market dynamics, and if the regulatory settings need to adapt,” he said.
“ASX is a firm advocate for making it simpler for listed entities, and there is ongoing work to continuously improve listing rules and processes. We’re also assessing initiatives to streamline the IPO process, including changes which aim to help reduce risk for investors and issuers.
“We will continue to listen and engage with our customers, ASIC and the industry so we can improve the experience for new and existing listed entities and drive a dynamic and globally competitive listed market.”
