For more than a decade, private capital formation has outpaced equity issuance in public markets, signalling a fundamental shift in global finance. This trend is not merely a symptom of public market decline, but rather a sign of private equity’s rise. This does not have to be a zero-sum game. There is a mutual benefit in ensuring that both public and private capital markets thrive.
Since 2015, global private capital formation – encompassing private equity, private real estate, private infrastructure and other non-public fundraising avenues – has overtaken equity issuance in public markets. This marks a seismic shift in how capital is raised and deployed across the globe.
South Africa represents an extreme version of the trend. This has largely been ascribed to a contraction of the JSE, a theory that ignores the simultaneous rise of private equity, which has reshaped global capital markets and provided an alternative avenue for funding growth.
While it is positive to see private equity taking its rightful seat at the table, we do not celebrate the decline of public markets. As much as private equity players stand to benefit from increased capital allocations and stock exchange delistings, public and private markets play key roles in a resilient financial ecosystem.
Globally, public markets have been grappling with a decline in the number of listed companies. The South African experience adds a compelling regional dimension. Public companies face stringent regulatory and reporting requirements, deterring many from listing.
In South Africa, these issues have been amplified by economic stagnation and political uncertainty. Increased offshore allowances under regulation 28 of the Pension Funds Act have worsened the local decline by providing additional options for local asset managers.
To revitalise the exchange, the JSE has streamlined listing requirements, rolled out segmentation initiatives, and reduced costs and regulatory burdens. This is promising, but it must also contend with the structural and systemic shifts that make private markets so attractive.
A key factor underlying the evolution of private markets has been increased institutional appetite for long-term investments. Pension funds, endowments and family offices have increasingly allocated capital directly to private markets. The allure lies in the ability of private equity managers to deliver outsized returns through strategic and operational improvements, improved quality of earnings for higher valuations and growth-driven scale.
Exclusive domain
Once the exclusive domain of large institutional investors, private markets are also more accessible to a broader range of asset allocators. Aggregation vehicles, wealth management firms and fund-of-funds structures enable high-net-worth individuals and smaller family offices to participate in private equity opportunities.
Importantly, private markets allow for longer investment horizons, bypassing the short-term pressures of quarterly earnings reports. Constant scrutiny from analysts and institutional investors – and the need to meet performance expectations – often compels public companies to prioritise immediate results over long-term strategic growth, making private ownership more attractive.
Certain growth-oriented sectors – particularly technology, education, health care, digital infrastructure and logistics – remain underrepresented on public exchanges, particularly locally. This limitation has pushed institutional investors towards private markets, where they can access emerging companies before they reach the public stage.
The decrease in IPO activity has constrained options for listed asset managers, driving increased allocations to private equity as an alternative. As a result, what was once a premier and viable exit strategy for private equity investments has diminished in prominence. Private equity managers now prioritise strategic acquisitions or secondary sales to other private equity funds as primary exit routes.
Furthermore, the minimum company size required to attract institutional asset managers – typically at least the equivalent of $1bn for a local IPO – often surpasses the exit valuations of the increasingly dominant mid-market private equity funds.
To make a meaningful impact for large asset managers, investments must meet a minimum size threshold, which frequently exceeds the range achievable by private equity-backed companies.
Nurturing environment
While listed markets may never return to their former dominance, a complementary relationship can yield mutual benefits. Private equity players have many reasons to hope for a return to health for listed markets.
Private equity often nurtures younger companies, providing them with capital and strategic guidance to scale. Upon reaching maturity these companies may list on stock exchanges, offering liquidity to private investors and growth opportunities for public market participants.
Public markets provide unparalleled liquidity and accessibility for retail investors and asset allocators, such as pension funds, which need to ensure they can meet their ongoing obligations to retirees and beneficiaries.
Moreover, the transparency and governance standards inherent in the listed space enhance overall market integrity. Public markets also provide important pricing benchmarks that strengthen valuation mechanisms in private markets. A lack of comparable valuation and financial data makes valuations in private equity less efficient.
Collaboration through hybrid models is also possible and growing. Such innovations as listed private equity vehicles focused on private market exposure offer a bridge between the two worlds. These instruments democratise access to private market returns while leveraging the infrastructure of public markets.
The sustained outperformance of private capital formation reflects a structural transformation in financial markets globally. While the advantages of private markets are clear, the decline of public markets poses challenges that cannot be ignored. A symbiotic relationship – where private markets drive innovation, and public markets offer broad access – is desirable and possible.
A resilient financial system depends not on one market eclipsing the other, but on fostering an environment where they coexist and contribute to sustainable economic growth.
Samantha Pokroy is the founder and CEO of Sanari Capital, a private equity firm investing in growth businesses across Africa. With over 20 years of experience in South Africa and the US, she has held senior roles at Ethos, Winona Capital, JPMorgan, and Stern Stewart. She has an MBA (Hons) from Chicago Booth, a BCom and BA Honours from Wits, and is a CFA Charterholder.
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