Powering the Growth Economy 2024

Representing only 6% of all businesses, the Growth Economy powers Australia’s prosperity, driving 42% of employment, 47% of R&D, and contributing 26% of GDP.

Despite their importance, Growth Economy businesses face a persistent barrier: scarce fit-for-purpose equity funding.

The result is a $38 billion equity funding gap.

Commissioned by the Australian Business Growth Fund, “Powering the Growth Economy” is Australia’s first-of-its-kind report on the Growth Economy – established businesses with revenues between $2 million and $100 million.

Based on interviews with over 3,500 SMEs, ATO and ABS customised data sets, and economic modelling, the report highlights the size and impact of Growth Economy businesses, the rising demand for equity funding, and the potential economic gains if the funding gap is addressed.

Read the at a glance article below for the report’s key insights and download the report here.

At a glance: Powering the Growth Economy 2024

***The Growth Economy can turbocharge* *Australia’s economic prosperity***

Around 164,000 innovative small-medium businesses have the potential to underwrite a new era of economic growth and prosperity, and build sovereign capability to ensure the nation’s security.

For the first time, the number of Growth Economy businesses (with revenues of between $2 million and $100 million, more than two years of operations, and headquartered in Australia) has been identified. They comprise 6% of all companies but account for 42% of all employment, contribute a quarter of Australia’s total economic output and account for nearly 50% of all research and development (R&D) spend in Australia.

Growth Economy businesses are the engine room of the economy

Not only is the Growth Economy a major contributor to the broader Australian economy, these businesses are punching above their weight. Their growth is outstripping the overall economy with a compound annual revenue growth rate of 5.7% (FY18 – 22), compared to the rest of the economy at 4.3%.

This growth is even more evident in jobs numbers, with Growth Economy businesses achieving 14% growth in employment (FY20 – 22), almost double the employment growth of larger businesses (8.0%) – and nearly five times the employment growth of smaller, micro businesses (3.0%).

Access to funding is critical, but debt alone won’t cut it: Growth Economy businesses need equity

Access to funding is a significant barrier to business growth, impacting 79% of Growth Economy businesses. Compared to Organisation for Economic Co-operation and Development (OECD) countries, the funding landscape for Australian small-medium businesses is dominated by debt with limited access to growth capital and venture capital (247 times debt to growth and venture capital).

Half of Growth Economy businesses rely on debt funding, regardless of their size, and only a fifth of Growth Economy businesses have any form of equity funding. Equity becomes more important as businesses grow, with 34% of larger businesses (revenue between $20 million and $100 million) having some form of equity, compared to 12% of smaller businesses (revenue between $2 million and $20 million).

The $38 billion equity gap is stifling growth

Private equity funds under management (FUM) in Australia has reached a record $65.5 billion. However, the vast majority has been used for major recapitalisation and large buyouts, with just 2% of private equity and 0.4% of venture capital funding being used for growth capital. While 35% of Growth Economy businesses sought external equity funding in the past three years, 53% were unsuccessful in securing this equity. Calculation of the external equity funding gap in the Growth Economy reveals a $38 billion gap.

Narrowing the equity funding gap will drive stronger and long-term economic outcomes

Growth Economy businesses estimate a 24.5% increase in revenue growth if they could access adequate equity funding. These businesses are critical in delivering government priorities to build sovereign capabilities as they disproportionately operate in segments outlined by the National Reconstruction Fund (NRF). Economic modelling also demonstrates the positive long-term impact of narrowing the external equity funding gap across investment, employment, wages and household consumption.

A new type of equity funding is needed to narrow the equity funding gap

Traditional investors haven’t historically seen commercial value in investing in Growth Economy businesses. Likewise, Growth Economy businesses don’t perceive value beyond the financing traditional investors provide; and they don’t want to give up control of their business. Consequently, 90% of investment into Growth Economy businesses comes from family and friends, not institutional investors that have the expertise and connections businesses need to scale.

The Australian Business Growth Fund (ABGF) was established through a unique public-private partnership and is based on a proven model from the United Kingdom and Canada. This model is designed to overcome the limitations of the traditional investment model and demonstrate the commercial viability of investing in Growth Economy businesses, so further investors will follow. Collectively, this can narrow the funding gap and strengthen economic prosperity for all Australians.