The Australian capital market is undergoing a profound structural shift as companies increasingly choose to remain private for longer. This trend has created a significant challenge for private equity (PE) funds, as traditional exit routes, particularly Initial Public Offerings (IPOs), have become severely constrained. The resulting liquidity mismatch is forcing funds to extend holding periods and seek alternative pathways to return capital to investors.

This transition, however, has also given rise to a critical strategic opportunity. The most notable development has been the maturation of the private equity secondaries market, which is emerging as an essential liquidity valve for the entire ecosystem.

Australia's Public vs. Private Markets

The Australian IPO market has cooled significantly, with volumes falling sharply as market volatility deters companies from public listings. This decline isn't merely a consequence of unfavourable market conditions; it's a deliberate choice by companies to avoid the burdens of a public listing. These disincentives are multifaceted and include the pressure to meet demanding half-yearly earnings expectations, the scrutiny of activist shareholders, and intense media attention.

The trend of companies staying private for longer has created a significant challenge for PE funds, whose success is predicated on the ability to exit investments within fixed fund lifecycles. Many funds are now struggling to exit their investments within the typical holding period timeframes. Exits remain well below historical levels, even as the number of sponsor-backed companies has soared. This is a global issue, but it is particularly acute in Australia, where the local IPO window has largely been shut since the end of 2021. The standard 10-year fund clock is now looking optimistic, with some funds warning that distributions could take 12 or even 15 years.

The Burgeoning Private Equity Secondaries Market

The lack of traditional exit pathways has made the private equity secondaries market a critical alternative for liquidity. Once perceived as a niche option for distressed or "panic sales," the secondaries market is rapidly maturing into a core strategic tool for investors.

Globally, the secondary market volume is expected to be between $180 and $200 billion. While Australia's market is still considered nascent relative to the US and Europe, demand is increasing significantly as more funds reach the ends of their terms without having found an exit.

Secondaries offer investors immediate exposure to private equity positions, providing the potential for accelerated returns by "skipping the J-curve." The current market environment, characterised by a valuation reset, has led to attractive entry valuations for secondary interests. Secondary transactions typically trade at a discount to Net Asset Value (NAV), with the discount size influenced by factors such as the maturity of the asset.

Pricing Trends: Average Discount to NAV

As shown in the chart, the average discount to NAV has been wider over the last three years, when compared to four or five years ago, reflecting a broader valuation reset. Today's market distinctly favours buyers, offering entry points not seen in over a decade. While the average discount is a key benchmark, the majority of transactions are clustered in the 10-20% discount range. Venture capital funds, with their higher risk and longer duration, typically trade at the highest discounts, while buyout funds, containing more mature and stable assets, command the tightest pricing.

A Fertile Ground for Growth Capital

The current market environment, characterised by an extended private company lifecycle and a focus on profitability, is creating a fertile ground for growth capital investors. Growth capital is defined as "patient capital" provided to established, commercially successful businesses that have already achieved a stable financial position. This stands in contrast to early-stage venture capital, which typically funds negative cash flow in exchange for hyper-growth, and traditional buyout funds, which often have a shorter investment horizon.

The very nature of the growth capital mandate makes it uniquely well-suited to the present market dynamics. As companies choose to stay private for longer and buyers now demand clear earnings over unproven growth, the investment thesis of growth capital finds its moment.

The iPartners Emerging Equity Fund approach targets both primary and secondary investments in high-growth companies in Australia, New Zealand, and Singapore.

To identify these opportunities, the fund follows a stringent investment process including:

o   a strong management team that is aligned with shareholder interests,

o   a proven revenue growth trajectory, and

o   clear profitability pathways.

The fund has been actively deploying into secondary opportunities at attractive entry valuations, investing in companies operating with structural tailwinds. With a target IRR over 20% p.a. the Emerging Equity Fund is well positioned to take advantage of the current private equity liquidity gap and provide investors with access to a diversified portfolio of Australian growth companies.