Clients are infinitely more informed in the digital age, but that doesn’t necessarily mean they know how to discern the useful information from the misleading. Addressing this divide is the role advisers will need to embrace as the new era unfolds.
The government’s plan to offer more flexibility around simple and scoped advice dovetails well with the advice format consumers prefer, according to new research from Investment Trends.
Private equity’s smaller sectors shine amidst information asymmetry advantage
Not all private markets operate the same way, and as you drill further down in debt and equity verticals, assorted sub-sectors and industry arenas, it becomes clear that some investment pipelines have more natural advantages than others.
According to investment teams at The Inside Network’s Alternatives Symposium in the Hunter Valley, the benefit pendulum is swinging towards the small- and mid-market private equity sectors, based on a few inherent advantages.
Private equity as a whole is a solid alternative asset class to begin with, explained Hamilton Lane’s Drew Schardt, with more private company ownership now than any time since public ownership was conceived.
“The asset class is growing,” Schardt said. “You’ve all heard the stories companies are staying private for longer, and the biggest reality is there’s just more of them. If you look at companies that have 100 million Aussie dollars of revenue or greater… 90 per cent of those companies in the global ecosystem are private and 10 per cent of them are public. On the public companies side, there’s only about half the number of publicly listed companies that there were 20 years ago.”
And while the market as a whole has gone private in a big way, Schardt says the ones with less than $100 million in annual revenue have a specific advantage. Because the growth has been so rapid, and so expansive, the related information and data streams about these companies have fallen behind. So while much is known about the big end of town, with large company data being tracked acutely, the widening diaspora of smaller and mid-sized companies aren’t well studied.
And that opens the door for private equity players with robust intel to make beneficial acquisitions, he said.
“It’s still is an asset class where information is not created equal, nor is accessing the different parts of that asset class created equal,” he said. “There’s widening dispersion of returns on the private market side… data has ben really hard to find in the asset class.”
Also at the conference, Fortitude Investment Partners founder Nick Dignam how his Brisbane-based private equity firms used this very same information asymmetry to its advantage in the small- to mid- private equity market.
“The companies in the private market spectrum that truly are harder to find and access and reach, those tend to be below the radar of the managers of private equity,” Dignam (pictured) said.
“The mid market tends to have a little bit more specialization within that private market ecosystem, there are 10 times as many companies of that size and scale compared to the large caps, and they’re less intermediated, less picked over. That usually means you can find greater purchase price value, typically with lower leverage. That has been very good.”
Ultimately, he said, the equation leads to more opportunity for the private equity teams that have the werewithal to take advantage of it.
“In Australia, the smaller end of the market has less capital and consistently attracts less capital, but there are a large number of private companies that are addressable in that market, and so that allows a couple of things,” he said.
“One is it allows more attractive valuations and structures on the way in. Secondly, it allows us to be really disciplined about the types of businesses that we can pursue, whether that’s industry types or different profiles of businesses. And the third is the ability to generate earnings growth in a smaller business with the right management expertise can be significantly larger than at the larger end of town.”
