Investing in a world with a shrinking stock market
21 May 2024: The supply of stocks the world over, and in SA, is shrinking. This requires institutional investors to think differently about returns going forward.
This is view of Navin Lala, client director at Old Mutual Alternatives Investments (OMAI), who was speaking on the sidelines of the Alternative Investment Forum recently.
“The investment opportunity set in private markets is growing, and at present is significantly larger than public markets the world over,” he said. “Institutional investors who have traditionally been allocating capital to only the listed market will need to carefully consider how and where to unlock new sources of returns against this reality.”
Data by Hamilton Lane suggests that the global investable universe of private companies is approximately 850% larger than public companies. Of businesses with revenue of over USD 100 million, there are 10 000 public companies compared to 95 000 private companies. In South Africa the picture isn’t too different, with the universe of private businesses being approximately 800% larger than the listed market.
“In addition, global trends show that bourses are growing in value, but the number of companies listed is shrinking and fewer counters mean fewer opportunities,” said Lala.
Reports indicate that the JSE has shrunk from over 600 listed companies to less than 300 over the past 30 years. But this phenomenon is not unique to SA.
According to The Economist, the equity issuance net of stock buy-backs so far this year is negative, at minus USD 120 billion — the lowest such figure since 1999. News reports suggest that the number of publicly listed US firms has dropped from approximately 7500 in 1997 to less than 4000 in 2015, while the London Stock Exchange has shrunk from 3250 companies in 2007 to less than 2000 in 2022.
So why are companies choosing to stay private for longer or delist altogether? According to Lala, there are wins for company owners as well as investors.
“Firstly, there are now more return opportunities in the private space than previously, and investors are seeing that private equity has a track record in delivering returns,” said Lala. “In addition, patient capital lends itself to better alignment with management, allowing them to implement their strategies and achieve their long-term objectives while avoiding the pitfalls of short-term shareholder demands; which may conflict with the longer-term ambitions of a company.”
According to The Economist, one of the reasons for this trend is that founders now face less pressure to go public because there are plenty of funds that are willing to invest in them. Private-equity funds managed USD 8.2 trillion by the middle of 2023, more than twice the amount in 2018, according to McKinsey.
“Alternative investments are more mainstream than a decade ago, and they are gaining in popularity,” said Lala.
Research suggests that family offices, corporates, endowments and foundations as well as pension funds are allocating more capital to alternative asset classes in the private markets. The Economist suggests that allocations from institutional investors to private equity have risen to 10% of their assets in 2023 from 6% five years earlier, at the same time allocations to listed equities have dropped by a similar amount, meaning that investors are getting exposure to privately held investments through their pension and mutual funds. Similarly, 64% of investors across the globe are planning to allocate to private capital over the next 12 months, with 85% of investors in Africa indicating the same.
“In addition, there is a global infrastructure super-cycle currently underway, where significantly more infrastructure investment is needed. It is estimated that more than USD 69 trillion in global infrastructure is required by 2025 to keep up with projected global demand. Given the magnitude of investment required, governments are unable to fund this themselves, requiring private sector investments to fill the funding gap,” said Lala.
What does this mean for investors?
For Lala, it is not a case choosing between alternatives or listed assets, but rather understanding that both play an important role in today’s portfolio, so as to unlock more returns against an uncertain future.
“For institutional investors concerned about the level of returns earned over the past 5 to 10 years and seeking additional sources of returns, the time is ripe for adding Alternative Investments to their portfolio mix, striking the right balance between listed and unlisted assets,” concluded Lala.
