Is the ASX Shrinking?

The Australian Securities and Investments Commission (ASIC) has released a discussion paper analysing the decline of public markets over the past decade while private markets continue to rise. This shift raises important questions: Is this a natural cycle? Should investors be concerned? What are the risks involved? Is the ASX Shrinking?

The Decline of Public Markets

Public markets, including the Australian Securities Exchange (ASX), have been shrinking as companies become increasingly hesitant to list. Historically, companies have turned to the stock market to raise capital, but today, they have alternative funding sources. Various platforms and financial aggregators now connect companies with investors, bypassing the need for an initial public offering (IPO).

The U.S. has experienced a similar trend. The Russell 5000 Index, once comprising 5,000 stocks, now only contains 3,500. Companies, particularly in the technology sector, often avoid public listing due to increased scrutiny, regulatory compliance, and pressure from shareholders. Many prefer remaining private until they are acquired by larger firms. For example, Uber waited 15 years before going public.

The Rise of Private Markets

Private markets have grown in prominence, offering investment opportunities outside the traditional stock exchange. One area of concern is private credit—where loans are issued by private funds rather than banks. Historically, banks provided most corporate loans, but stricter regulations have led them to focus more on household and real estate lending. In response, high-net-worth individuals and investment firms have stepped in to provide funding directly to businesses.

ASIC is particularly focused on how this affects superannuation funds. Industry super funds, such as Australian Super and Australian Retirement Trust, now allocate approximately 22% of their portfolios to private markets. While these investments often yield higher returns—7-9% in Australia and double digits overseas—they come with liquidity risks. Unlike publicly traded shares, private market investments cannot be easily sold.

Why Should Investors Care?

ASIC’s primary concern is liquidity risk—how quickly investors can access their money when needed. If financial stress emerges and many super fund members demand withdrawals, funds might have to sell publicly traded assets at poor prices, disadvantaging remaining investors. This scenario could lead to significant volatility in the public markets.

Another issue is valuation transparency. Unlike stocks, which are priced in real-time, private market assets are difficult to value. Investors may not realise a loss in value until a loan defaults or a business fails. ASIC warns that while these products can be lucrative, they require careful evaluation and may not be suitable for all investors.

The Future of Public and Private Markets

Despite the shift towards private markets, ASIC suggests that increased transparency and liquidity solutions could help maintain confidence in public markets. Some experts believe that more private assets should eventually be listed to provide better liquidity.

For retail investors, the key takeaway is awareness. Private markets may seem attractive, offering higher returns, but they come with risks that require careful consideration. Seeking professional advice and understanding investment horizons are crucial steps before diving into these markets.

In a rapidly evolving financial landscape, striking the right balance between public and private market investments will be essential for long-term economic stability