Listings on the ASX have fallen in the past two years. Is this a sign of structural decline, as observed in the US and the UK, or is it a cyclical dip?
Last month, the World Federation of Exchanges, an industry association for exchanges and clearing houses, rang the alarm bell in an open letter to policymakers, regulators, market participants and the global investment community more broadly.
The number of initial public offerings (IPO) globally has fallen to its lowest level in five years. This is not merely a fluke, the association said, the fundamental role of public markets in supporting innovation, job creation and equitable wealth distribution is under threat.
“The rise of private capital and alternative asset classes, such as cryptocurrencies, coupled with declining liquidity and valuations across many markets, including developed markets, has led to a worrying dislocation. Companies are staying private longer or bypassing public markets entirely,” the federation said.
The letter was signed by not just European and United States stock exchanges, which have been experiencing declines in public listings for decades, but also compelled a number of Asian stock exchange bosses to put their signatures to the letter, including those of the Singapore Stock Exchange, Japan Exchange Group, National Stock Exchange of India and Shanghai Stock Exchange.
The change in the UK and the US is definitely structural. In the US, it changed in the late ‘90s and it fell by about 50 per cent and has remained at about that level over time. And the same in the UK, although a little bit later, after the financial crisis, they also had a clear change in the trend
The Australian Securities Exchange (ASX) did not sign the letter, even though it is a member of the federation, but also here a decline in listings has been observed.
The number of listed companies on the ASX fell by 145 over the period January 2023 to December 2024 and this was the largest two-year decline since the recession in the early 1990s, according to ASIC report 807 “Evaluating the state of the Australian public equity market: Evidence from data and academic literature”, compiled by Dr Carole Comerton-Forde of Charles Lane Advisory.
The question is now whether this is a precursor to a structural decline in the Australian market, akin to the trend in the US and the United Kingdom, or something more cyclical. Dr Comerton-Forde, who is also a Professor of Finance at the University of Melbourne, says it is too early to call it structural.
“The change in the UK and the US is definitely structural. In the US, it changed in the late ‘90s and it fell by about 50 per cent and has remained at about that level over time. And the same in the UK, although a little bit later, after the financial crisis, they also had a clear change in the trend,” she says in an interview with [i3] Insights.
“So I think that I would characterise the US and the UK changes as being structural, whereas I think the key distinction in Australia is that it is just the last few years that there’s been a decline and so that’s why I think it’s too early to say it’s a structural change. It could just be cyclical.”
Drivers Behind Companies to Stay Private for Longer
The drivers behind the decline in other parts of the world are numerous and Comerton-Forde describes a number of them in her report to the regulator.
It is not so much the increased scrutiny that followed the global financial crisis, with the introduction of the Sarbanes-Oxley Act 2022, and rising cost from regulation that have affected listings, but rather the reductions in regulatory barriers in private markets and the substantial increases in the amounts of private capital available to companies.
The abundance of private capital has also enabled founders to retain higher ownership stakes, giving them more voice in the decision about whether or not to go public.
Comerton-Forde also notes the nature of companies has changed, where today they are less capital intensive as intangibles, such as software and intellectual property, have become more important. The reduced capital requirements mean businesses can delay or even avoid listings.
If in five years’ time we're still seeing declines in the number of companies that are public, then you can probably call that a structural change. But for now I think we should be optimistic and hope that we can continue to build interest in the public market
Greater weight on intangible assets also means companies have become harder to value, which plays into the hands of sophisticated investors who have deep technical expertise in private markets, Comerton-Forde writes.
Besides, Australian listings tend to involve relatively small businesses. Nearly 80 per cent of capital raised by IPOs over the past 20 years is for companies with market capitalisations of less than $75 million, the report shows.
These companies are too small for the large superannuation fund investors, who have started to outgrow the local market and increasingly look to park their money in international equities and private markets.
Yet, Comerton-Forde warns it would be premature to extrapolate the trend in other markets to the Australian experience.
“We’ve seen periods before where the number of listings declined at a similar level as we’ve observed in the last couple of years,” she says.
“I think at this point, it’s not clear that it is a structural change in the public markets, although I do think there is a clear structural change in the private markets. There is definitely a lot more capital there and that’s been building over the last 10 years.
“If in five years’ time we’re still seeing declines in the number of companies that are public, then you can probably call that a structural change. But for now I think we should be optimistic and hope that we can continue to build interest in the public market.
“And while I think there’s a place for both public and private in the capital markets, public markets do provide a really important public good in terms of liquidity and price discovery that we don’t get from the private markets.
“They’re complementary forces. I think that you need a healthy public market in order to have a healthy private market.”
Trouble in Private Equity Land Could See a Return to Listed Markets
And it is not all smooth sailing for private markets either. For example, the past few years have not been kind to private equity (PE) markets, where managers are increasingly forced to launch continuation funds to cover for the lack of exits from investee companies.
Partly this is a result of investors seeking liquidity after many years in a closed-end fund, but PE managers are not getting the prices they need to generate healthy returns.
But it is also due to the changes in market conditions. Interest rates have risen sharply over the past two years and this has resulted in capital shifting away from long-term growth assets to short-term, lower-risk, interest-bearing assets.
“We can observe that there’s a bottleneck in the private equity space, particularly in the buyout world, where they have investments that you would expect to have exited by now and they haven’t. And so that means limited partners (LP) are not getting funds returned to them,” Comerton-Forde says.
“At the moment, that seems to be okay because the private equity firms have got a lot of dry powder. There’s still lots of opportunity to make new investments, but at some point if private equity firms can’t exit their positions and they’re not returning money to LPs, LPs are not going to be participating in new funds.
“That will create a bit more of a bottleneck in the private market and that’s where people might be forced to go back to public markets.”
Private equity firms have got a lot of dry powder. There's still lots of opportunity to make new investments, but at some point if private equity firms can't exit their positions and they're not returning money to LPs, LPs are not going to be participating in new funds. That will create a bit more of a bottleneck in the private market and that's where people might be forced to go back to public markets
Another motivation for companies to return to public markets might be the fact PE managers haven’t been generating the outsized returns the sector is known for. With returns in line with listed markets, investors are questioning whether the higher risk and lower liquidity associated with PE still make sense.
“If you look over older vintages of private equity firms, they substantially outperform the market, but in the recent years, that’s no longer always the case,” Comerton-Forde says.
“They’re getting returns that are similar to public markets, and that’s before you take into account the fact that private equity investments are more leveraged, are illiquid and so you should be receiving a premium for bearing that cost of illiquidity.
“Private equity should be generating higher returns in order to compensate investors for an equivalent level of risk.”
Dr Carole Comerton-Forde spoke at the [i3] Equities Luncheon held in Sydney and Melbourne last month. To see a gallery of the event, please click here.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.