This article was produced in partnership with Netwealth
The change in private markets is structural and not cyclical, and is the result of companies becoming less profitable after they are listed, the Netwealth Accelerate Summit has heard.
Speaking in Melbourne at the summit, Marco Bizzozero, head of international at private market fintech iCapital, said this has become of strategic importance for investors who would benefit from jumping in early to gain the uplift in returns before companies become listed on public markets.
“You see some companies that went public 20 years ago where the value happened after the IPO [initial public offering], today is actually the opposite,” Bizzozero said.
“Today is there is one third of the public companies compared to 20 years ago. At the same time, there is a significant increase of companies back by private equity managers.
“Only 35 per cent of the companies today that go public are profitable. I’m not saying this is bad or wrong, it’s just a fact. In the past it was completely different and that’s where you see the shift of public and private market.”
Bizzozero said the switching of roles between public and private markets has been due to the outperformance of private markets over multiple market cycles.
He referred to data going back to 2001 showing private equity delivering 13.8 per cent per annum versus 8 per cent per annum from the S&P 500 index.
Bizzozero said companies are staying private longer and will go public later in their life cycle. On average companies go public after 11 years, whereas 20 years ago the average was seven years.
“The valuation is different – 20 years ago a company went public below $1 billion in valuation now it’s closer to $10 billion,” Bizzozero said.
“What it means is that most of the value creation happens when companies are private which means you as an investor have access to this value creation. If you don’t have access to private market as an individual investor you don’t get access to this value creation.”
However, he noted there was still barriers investor access which has prevented higher allocations to this asset class.
Key barriers to private markets access are that it’s difficult to identify who the managers are, investment minimums are too high, and it’s still a paper-based investment process.
“Instead of creating a good client experience it creates a bad client experience,” Bizzozero said.
He cited a survey of high-net-worth individuals who were asked to name three leading alternative/private equity manager with ‘I don’t know’ being the top response.
“And a few other names that aren’t the typical private equity firms that we know about,” Bizzozero said.
“That means there is a lot of work to do in education the community about who those managers who create value in private markets.”
However, the ones who are taking an interest in private markets are doing so because they want to be able to show something unique to their clients.
“You want to use this to acquire new clients…but if the experience is like this then you don’t do it or you do something else,” Bizzozero said.
“One of the major reasons the allocation has been so low is the difficulty of accessing it and that’s where technology will come in.”
The comments came as Netwealth announced it had secured exclusive Australian platform distribution rights to iCapital, which is understood to be the world’s largest private markets-specific platform.
Netwealth CEO Matt Heine told the summit the iCapital arrangement was one of a number of ways in which the company was positioning to help advisers take advantage of a major cultural shift, as the profession moved from a regulatory compliance to an innovation mindset.
