What is the future of Australian capital markets?

Australian capital markets are undergoing significant changes, raising questions about their role in driving economic growth and innovation.

Australia’s capital markets are undergoing significant change, raising questions about their role in driving economic growth and innovation. Both public and private markets are essential for business investment and development, but how can Australia ensure that both remain strong and efficient as we continue to grow?

ASX is the leading prestigious exchange in Australia. Illustration photo

Number of companies listed on ASX falls

Australia’s public equity markets have long been a bedrock of the financial system. Their total market capitalization, at more than $3 trillion, is approaching record highs. However, between December 2022 and December 2023, the number of companies listed on the Australian Securities Exchange (ASX) fell by 145 to 1,989. The decline, driven by fewer new listings (66) than delistings (211), may be concerning but it is not unprecedented.

With reports of a long list of initial public offerings (IPOs) by 2025, this decline may be cyclical. However, a more worrying trend is the decline in market capitalisation relative to gross domestic product (GDP) and Australia’s shrinking share of global market capitalisation.

Other developed markets, such as the US and Europe, have seen a long-term decline in the number of listed companies, starting in the late 1990s for the US and in 2008 for Europe.

Academic research points to three main causes for this decline: regulation, changes in business models, and the development of private capital markets. Regulation is often cited as a deterrent to IPOs, but empirical evidence suggests that its impact is only a small part of the problem. A more important factor is the shift to less capital-intensive industries, such as technology and services, which have fewer tangible assets and therefore do not need to raise as much capital through public listings.

But the most important factor in this change is the rise of private capital. More private capital allows founders to retain a higher percentage of ownership and avoid going public.

These global anecdotes are closely related to trends in the Australian market. While the regulatory burden on Australian listed companies is often cited as a major obstacle to IPOs, the reality is that the regulatory framework has not changed significantly in recent years.

Yet many business executives still express concerns about compliance costs and governance responsibilities, which are perceived as distracting from strategic decisions. Continuous disclosure obligations, shareholder pressure and governance responsibilities make management feel distracted from long-term growth. These concerns are not new, but the decline in the number of listed companies is.

Important turning point in capital market development

Private equity funds focused on Australia have grown 350% from A$29.8 billion in 2010 to A$139 billion in June 2023. This allows founders to keep their companies private, avoiding the price volatility of public markets and regulatory scrutiny. Unlike the cyclical decline of listed companies, the rise of private markets appears to be structural, with an increasingly important role in the economy.

Private markets are also expanding their reach to a wider group of investors, fueling stronger growth.

Another important factor in the Australian capital markets landscape is the huge amount of superannuation assets. With over AUD 4 trillion in assets, superannuation funds have a significant influence on the Australian capital markets. Funds regulated by the Australian Prudential Regulation Authority (APRA) hold approximately 23% of the total market capitalisation of companies listed on the Australian Securities Exchange. This concentration of capital requires funds to diversify their portfolios, driving increased allocations to both international public markets and domestic and international private markets.

According to APRA figures, the superannuation funds it manages allocate between 0% and 38% of their assets to private investments. The two largest funds, AustralianSuper and the Australian Retirement Trust, have about 22% of their portfolios in private assets.

Historically, private markets have been largely the preserve of professional investors and thus subject to only light regulatory oversight. However, as private markets expand to include a wider range of investors – through private equity funds and indirectly through pension funds – a review of the regulatory framework is warranted.

There are a number of challenges to address. Transparency about investment performance and management costs is important, as is the control of conflicts of interest. In particular, the accuracy and timing of private asset valuations is important in the context of pension funds that must provide daily liquidity to their members. Inaccurate valuations can have a significant impact on the value of an investor’s assets.

Australia is at a critical juncture in the development of its capital markets. The regulatory framework needs to accommodate the growth of private markets while ensuring that public markets remain attractive and competitive for businesses.

The Australian Securities and Investments Commission (ASIC) has released a consultation paper, sharing its initial views and calling for market engagement to guide future decisions. Insights and practical solutions from market participants are needed to shape the future of both public and private markets. Navigating this transition successfully will help protect the long-term sustainability of Australia’s capital markets.

The future of Australia's financial system depends on how we respond to these challenges today.

Australia’s public equity markets have long been a cornerstone of the financial system, with their total market capitalisation, at more than $3 trillion, approaching record highs.

Source: https://congthuong.vn/tuong-lai-cua-thi-truong-von-australia-se-nhu-the-nao-377183.html