Australia’s appetite for private equity investment is growing

Private equity (PE) and unlisted assets have generally been an investment option reserved for institutional investors and funds. Australia’s sovereign wealth fund, The Future Fund, has an allocation of 15 per cent in private equity, while many of Australia’s large superannuation funds have allocations of between five and ten per cent in their largest investment options.

However, fuelled by changing behaviours and conditions in the market, PE is surging in popularity amongst individual investors and families. In this article, we’ll look at the tailwinds driving individual investment in PE, and reasons you might consider PE investment.

Changing market preferences

1. Decrease in number of listed companies

The number of publicly listed companies has declined in recent decades, as seen below in Figure 1. This is due partly to the increasing costs and red tape associated with being a public company alongside the fact that publicly listed companies are beholden to shareholder interests which have grown increasingly short-term focussed, ultimately preventing meaningful long-term strategic planning. As a result, many companies are opting to stay private.

In contrast, the number of private companies has been growing in this time. In Figure 2 we can see the number of private companies with over $100M in revenue far outweighs the number of public companies at that level. For investors, this shift means fewer opportunities to invest in public markets and a growing need to explore private markets, where there is an abundance of emerging and high-potential companies, for return on investment.

Figure 1: Number of US listed companies 1997 to 2019. Source: Hamilton Lane, A Guide to the Private Markets

 

Figure 2: Number of public vs private companies in Europe, Asia and the U.S. with revenue Source: Hamilton Lane, A Guide to the Private Markets

2. Growth in private wealth

The second key driver behind the growing interest in PE is a rising number of high net-worth (HNW) individuals, defined as having ‘investable assets of USD$1 million (AUD$1.5 million) or more, excluding their primary residence, collectibles, consumables, and consumer durables’. Australia has seen significant growth in this demographic, with new research revealing high-net-worth wealth in Australia grew 7.9 per cent in 2023, well above the global average of 4.7 per cent, and there are now 333,000 Australians that fit the bill. This growth is also reflected in Figure 3 below.

Investment managers have begun to tap into this growing market, with increased demand for return on investment bringing private equity into the light.

Figure 3: Rate of growth of HNW individual wealth in 2023. Source: Capgemini World Wealth Report 2024

Consider whether PE is right for you

As financial advisers, we often get questions regarding private equity as an investment option for individuals. Two of the most common questions surround risk factors and return on investment.

“Isn’t private equity risky?”

When most people think about private equity, thoughts of early-stage startups often emerge – companies with high growth potential but also high rates of failure (this is called venture capital).

In contrast, at BDO Private Wealth, we prefer PE investmentthat acquire and restructure established companies, to grow, improve efficiency, and sell at a profit (these are called buyouts). These investments target mature businesses with stable cash flows and require investor capital to take their business to the next level.

These types of businesses can be accessed via ‘evergreen funds’. Unlike traditional private equity investments - which have fixed lifespans and periodic fundraising (i.e. capital calls) - evergreen funds allow for continuous investment into a portfolio of already established private businesses.

To learn more about evergreen funds, speak to your financial adviser for up-to-date advice. You can find out more about the business side of private equity investment and capital raising in this 2022 article from our private equity specialists.

“Are the returns on private equity worth it?“

PE often sees stronger returns when compared with publicly listed companies, however this comes with a trade-off in liquidity - a key difference between private and public investments. Public investments can be sold with ease on the stock market, while private investments do not have this luxury. Liquidity is tied to an event, such as the sale to another buyer, or the company becoming publicly listed (in an initial public offering (IPO)).

Evergreen funds provide some liquidity for PE investment, but this can dry up in extreme market conditions. With this in mind, investors have been rewarded for this illiquidity in the form of higher returns when compared to public assets, as seen in Figure 4 below. Over five-, ten-, and fifteen-year periods to May 2024, PE consistently outperformed public companies, according to Lonsec data. 

Figure 4: Private vs public asset returns over five-, ten- and fifteen-year periods to 31 May 2024. Source: Lonsec, investment returns for periods ending 31/05/2024

BDO comment

An allocation to private equity in a long-term strategy can offer investors the opportunity to diversify their portfolios and achieve higher returns. As the investment landscape continues to evolve, private equity offers investors a compelling opportunity to tap into the growth potential of private companies and benefit from their success.

Given the intricate nature of evaluating individual circumstances, it is vital to seek professional financial guidance before acting on the information provided.

If you would like to know more about investing in private equity, or how it may fit into your long-term investment strategy, our Private Wealth advisers can support you with tailored advice to your personal situation and values. Reach out today for a no-obligation chat to learn how we can support you.

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Disclaimer

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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