A growth equity perspective

The interplay between listed and private markets is a cornerstone for investors navigating growth equity. Listed markets shape private market dynamics by acting as a benchmark for valuations, a sentiment barometer, and often the ultimate exit pathway. This relationship is particularly vital for businesses in the growth space that rely on equity funding to scale operations and achieve long-term success.

1. The Current State of Play in Listed Markets

Market Sentiment and Performance

Since the peak in 2021, the Australian listed market has experienced cyclical volatility influenced by macroeconomic factors such as rising interest rates and global uncertainties. Of the 2,770+ public companies on the ASX, that sit across 11 market sectors, technology and healthcare sectors show resilience, whereas industries such as retail and real estate have faced valuation pressures.

Since early-2023, multiples in the healthcare sector have continued to rise from 7x EBITDA to 11.6x in October 2024 and since April 2023, has continued to outperform the ASX200[1]. Conversely, the retail sector generally sat between 7.5-8.5x EBITDA during this same period and remained to be behind the ASX 200[2].

Appendix 1: Australian Healthcare Sector - Forward EV / EBITDA Multiples (monthly to 31/10/2024)[3]

Appendix 2: Australian Consumer Goods and Retail Sector - Forward EV / EBITDA Multiples (monthly to 31/10/2024)[4]

2. The Influence of Listed Markets on Private Market Dynamics

Benchmark for Valuations

Private market valuations often mirror trends in public markets. For instance, when listed market multiples contract, private market valuations tend to follow suit with a lag of 6-12 months.

As Australian private equity primarily targets large buyouts and recapitalisations, leaving growth equity capital significantly underfunded. Private equity funds under management (FUM) in Australia has reached a record high level of $65.5 billion. However, most of this capital has been used for major recapitalisations and large buyouts. Only 2% of private equity and 0.4% of venture capital funding being used for growth capital. While 35% of Growth Economy businesses sought external equity funding in the past three years, 53% were unsuccessful in securing this equity. As such, this reveals a $38 billion funding gap[5], which in turn highlights the need for robust valuation practices rooted in listed market benchmarks.

It is widely known that private equity and venture capital consistently outperforms listed markets in the medium to long-term. This is primarily driven by the higher risk and illiquidity of private equity require it to generate +3% to +5% over public markets over time and the Australian PEVC index has surpassed this standard hurdle across periods.

Appendix 3[6]: Australia PEVC has Consistently Outperformed the Public Markets Over Medium and Long Term

Sentiment and Deal Activity

Bullish listed markets encourage private market fundraising and deal-making, while bearish conditions foster caution. This dynamic shapes growth equity investors' ability to deploy patient capital.

Exit Pathways

Notwithstanding recent trends, listed markets serve as a critical exit route for private investments. IPOs offer shareholders a strategic exit and companies that achieve scale and profitability often turn to IPOs for liquidity and growth capital. Conversely, with IPO activity subdued, trade sales and secondary buyouts have become preferred exit routes. The Australian Business Growth Fund[7] noted that only 2% of private equity investments are growth-focused, which suggests limited IPO prospects.

Listed Market Trends Shaping Growth Equity

Listed market trends undeniably shape the private equity, growth and venture capital space. In particular, listed comparables form the benchmark for sector-specific unlisted valuation methodologies. Further, valuation dispersion among sectors offers insights for private investors. For example:

• The technology sector maintains high-growth potential but is under pressure due to rising interest rates;

• The healthcare sector has remained resilient due to demographic tailwinds; and

• The resources sector has sustained stability and this is driven by global demand for commodities.

Correlation with R&D Investment

The Australian Business Growth Fund[8] reported that growth businesses contribute 47% of Australia’s R&D spend, underscoring the importance of aligning funding with sectors where innovation is critical. This also supports the trend of high multiples in the technology and healthcare sector, both of which are high growth industries driven by technological advancements and scale.

Geographic Considerations

Between 2018 and 2022, the number of growth businesses in regional Australia increased from 29% to 32%[9]. As regional Australia is rich in resources and vibrant communities, it plays a meaningful part of the country’s economic activity and offers

opportunities for investment that can drive aggregate growth, especially outside major cities. As a result, the rise of growth businesses in regional Australia reflects the decentralisation of economic activity, which may open new opportunities for private growth investments.

4. Navigating the Future: Lessons for Growth Equity Investors

In summation, analysing the interactions and disparities between the listed and unlisted equity market, there are some key learnings for growth equity investors:

• Patience in Capital Deployment: Unlike pre-IPO investments, growth equity funds benefit from longer investment horizons, which allow businesses to achieve sustainable growth without the immediate pressures of public market expectations. This is a key reason why private markets outperform public markets and patient capital pays off in the medium to long-term.

  
  

• Alternative Exit Planning: With IPO markets continuing to be closed, IPO opportunities remain at an all-time low. This means that investors must consider trade sales, recapitalisations, or holding investments longer until listed market conditions improve.

  
  

• Value Beyond Capital: Growth equity must differentiate from listed markets by offering strategic support, governance expertise, and network access to portfolio companies. This approach can ultimately bridge the gap between founder needs and investor expectations.

Disclaimer

This report provides general information and is not intended to be an investment research report. Any views or opinions expressed are solely those of the author. They do not represent financial advice. This report has been prepared without taking into account your objectives, financial situation, knowledge, experience or needs. It is not to be construed as a solicitation or an offer to buy or sell any securities or financial instruments. Or as a recommendation and/or investment advice. Before acting on the information in this report, you should consider the appropriateness and suitability of the information to your own objectives, financial situation and needs. And, if necessary, seek appropriate professional or financial advice, including tax and legal advice.

[1] FactSet Research Systems Inc as at 31/10/2024

[2] FactSet Research Systems Inc as at 31/10/2024

[3] FactSet Research Systems Inc as at 31/10/2024

[4] FactSet Research Systems Inc as at 31/10/2024

[5] Powering the Growth Economy Report 2024, Australian Business Growth Fund

[6] Performance Update Q1 2023 Australia Private Equity And Venture Capital Index, Cambridge Associates for the Australian Investment Council

[7] Powering the Growth Economy Report 2024, Australian Business Growth Fund

[8] Powering the Growth Economy Report 2024, Australian Business Growth Fund

[9] Powering the Growth Economy Report 2024, Australian Business Growth Fund