Despite concerns around the shaky growth of the Australian Securities Exchange (ASX) and a shift of capital towards private markets, a CIO believes that the flourishing of the unlisted market could actually benefit the listed markets.
Last year, the ASX contracted by $55 billion, attributed in part to shifting market dynamics, including declining IPO activity and a growing preference for private markets.
Some 156 companies withdrew from the exchange in the last financial year, according to the latest ASX Group Monthly Activity Report, up from 119 delistings in the same period last year.
The report also noted a decrease in the total number of entities listed on the Australian Stock Exchange, which fell to 2,155 as of June’s end, down from 2,255 a year earlier.
For Simon Hudson, co-CIO at Playfair Asset Management, the perceived decline in equity and listed markets in favour of unlisted markets is overstated, noting that institutional listed equity markets are significantly larger.
“I think it gets overdone to a large degree – certainly from what I’ve seen in industry forums and the press – that we’re seeing a decline in equity markets and listed markets and the rise of unlisted markets,” he told Super Review.
“The reality is that from an institutional investor’s perspective, listed equity markets are multiple times larger than the current unlisted institutional equivalent – some statistics have it as being 10 times larger, though it can be difficult getting accurate numbers of the size of the institutional unlisted ‘market’.”
EY forecasts around US$24.4 trillion of capital is now invested in private markets.
But, Hudson said, while assets like infrastructure see more balance between listed and unlisted markets, listed equities “absolutely dwarf” their unlisted counterparts, particularly in the supply of “institutional grade” assets or companies that are of high quality and scale for super funds to hold stakes in.
“It has to be of a size and scale whereby it’s going to be meaningful in [super fund] portfolios over time and it’s going to generate appropriate returns, sustainably, with a level of quality,” Hudson said.
In this context, he said that it is beneficial for listed markets if the unlisted market expands, pointing out that there are numerous companies listed on exchanges globally that likely shouldn’t be.
“This has fascinated me for a long time. The reality is, there are many companies listed on exchanges – and this is a global phenomenon – which actually would be better off if they wouldn’t. For example, biotech companies listing too early or micro caps that would be better off unlisted. Family companies are also notorious [for this],” Hudson said.
While the trend varies between sectors and industries, he observed a lot of companies rush to make an initial public offering (IPO) too early and “suffer the consequences”.
“A lot of it revolves around the maturity of the company itself, like a start-up with a good idea. It will be small initially, and when it starts growing, that’s usually when a venture capital firm or private equity company steps in and helps them ‘start to institutionalise’ and broaden their capabilities, [with] a high-quality board, compliance, and [address] all these issues they need to resolve,” Hudson said.
These companies can be “excellent” in the right hands that help them mature to the next phase, Hudson said. Unfortunately, many have instead opted to rush to list.
“Whereas, if they go into an institutionalised, unlisted capital structure, that helps them mature and get ready to IPO, should they want to do so,” he said.
For institutional investors such as super funds, this becomes a critical consideration as many aim to maintain substantial, long-term positions. Hudson said that it is advantageous for these investors if companies are more established and “institutionalised” by the time they list.
“The reason this will benefit listed markets, ultimately, is because it can be a genuine segue for [companies] to mature. It’s a stepping stone so they’re better prepared for being listed,” he said.
Which companies should list?
Still, the investment executive said there is an important place for listed exchanges around the world and getting a public listing can offer “enormous” benefits for companies.
The latest ASX Group Monthly Activity Report found 56 new companies were admitted to the exchange throughout the 2024 financial year, compared to a slightly higher 57 in 2023.
“The thing with listed companies is that all the regulations, compliance, everything that goes around it being listed can be quite onerous, however the benefits of being listed are enormous. You get scaleability and your ability to raise capital quickly is far more enhanced,” Hudson said.
For sectors like banks, capital raising can prove particularly beneficial, he said, while providing investors with necessary scrutiny and transparency.
“The banking system is so important to the overall economy that they need that scrutiny, they need those regulations, but also quick access to capital. It has helped so many banks in so many potential financial crises over generations,” he told Super Review.
A similar argument could be made for companies that are in the public interest and nationally significant, he said, such as energy providers, airports, and other utilities.
“I’m a very big believer that, for companies past a certain point in terms of size and scale, it’s in everybody’s interest for them to be listed,” Hudson said.
“It may sound a bit idealististic, but it’s largely because of the scrutiny, the transparency, the accountability, and also the ability to fix things if they go wrong. In listed companies it’s easier and quicker for that to happen than unlisted. With unlisted, there’s just not the same level of corporate governance and transparency.”
