Private markets have grown significantly over the past decade, fuelled by increasing allocations from both institutional and private capital.
However, despite the considerable expansion of private investments, it is important not to overlook the intrinsic link private markets have with public markets, which play a critical role in supporting the viability and functionality of private investments.
Growth of Private Markets in Australia
Australia has seen a remarkable surge in private market investments in recent years. According to the Australian Investment Council (AIC), the private equity and venture capital sectors grew by over 20% in 2023, with the industry surpassing A$100 billion in assets under management (AUM) (Australian Investment Council, 2023). This figure is projected to reach A$120 billion by the end of 2024, representing a 12% increase in a single year.
The increase in private market activity can be attributed to several factors. Firstly, ultra-low interest rates have driven investors to seek higher returns in alternative asset classes, including private markets (Reserve Bank of Australia, 2023).
Secondly, both private capital and institutional investors, such as superannuation funds, have diversified their portfolios to include private investments in search of enhanced returns and greater diversification (Australian Prudential Regulation Authority, 2023). The growing allocation of superannuation funds to private markets reflects a broader trend where investors are willing to trade liquidity for potential growth.
Exit Strategy and Liquidity
One of the most significant reasons private markets rely on public markets is the liquidity they provide. Initial Public Offerings (IPOs) remain a primary exit strategy for private equity firms and venture capital investors, allowing them to realize gains and return capital to their stakeholders (PitchBook, 2023). In Australia, the ASX (Australian Securities Exchange) saw a resurgence of IPO activity in 2023, with 88 companies listing and raising over A$7.4 billion (Australian Securities Exchange, 2023). This trend is expected to continue into 2024, with several high-profile private companies preparing for public listings.
Valuation Transparency
Public markets also play a critical role in setting valuations for private companies. Private market valuations often rely on comparable publicly traded companies, especially in sectors like technology, healthcare, and finance. For instance, in 2024, the average valuation of tech companies on the ASX was reported to be 25% higher than in the previous year, providing a benchmark for private firms looking to raise funds (Australian Financial Review, 2024). This benchmarking allows private companies to better assess their valuation in the context of the broader market.
Moreover, public markets offer transparency in pricing and performance, which is crucial for investors when assessing private companies. Without this transparency, private market valuations can become inflated, leading to potential mismatches in investor expectations (Preqin, 2023). Public markets keep private markets grounded by offering a clear, real-time indication of how similar companies are valued, helping investors make more informed decisions.
Regulatory Framework and Investor Confidence
Public markets are subject to strict regulations and reporting requirements, ensuring a level of accountability and transparency that private markets often lack. These regulations, governed by ASIC (Australian Securities and Investments Commission) and ASX rules, play a significant role in fostering investor confidence (Australian Securities and Investments Commission, 2023).
For private companies, listing on public markets is not only a way to raise capital but also an opportunity to demonstrate credibility and meet rigorous standards for governance and reporting.
As ESG considerations become increasingly important to investors, both private and public companies are being held accountable to higher standards of transparency and social responsibility.
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References
Australian Investment Council. (2023). "Private Equity and Venture Capital Industry Overview." Retrieved from Australian Investment Council.
Reserve Bank of Australia. (2023). "The Impact of Low Interest Rates on Investment Strategies." Retrieved from RBA.
Australian Prudential Regulation Authority. (2023). "Superannuation and Private Equity Investments." Retrieved from APRA.
McKinsey & Company. (2023). "The Evolution of Private Markets in Australia." Retrieved from McKinsey.
PitchBook. (2023). "Global IPO Trends and Private Market Exits." Retrieved from PitchBook.
Australian Securities Exchange. (2023). "2023 IPO Activity and Market Trends." Retrieved from ASX.
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