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Capital Markets: Keeping the score on the capital markets front

By Tim Bennett

Do we have the foundations in place to ensure New Zealand's capital market can perform, asks Tim Bennett
NZX ticker located in downtown Auckland opposite Britomart train station.
NZX ticker located in downtown Auckland opposite Britomart train station.

A new regulatory environment and a wave of new listings, kick-started by the Government's share offer programme and growing KiwiSaver funds, were heralded as the catalyst for the revitalisation of New Zealand's sharemarket.

Three years after Mighty River Power's NZX listing, and five years since the Financial Markets Authority was established, it's a fitting time to assess how effective this programme of change has been and what challenges lie ahead.

The headline statistics are impressive: over the past three years the S&P/NZX 50 Index is up 48 per cent, and equity market capitalisation to Gross Domestic Product ratio, a key indicator of market health, has risen from 35 per cent to 47 per cent.

However, these numbers, especially viewed against the backdrop of New Zealand's strong economic performance, don't necessarily give a clear picture of the underlying health of the capital market ecosystem.

Is the sharemarket considered a viable source of capital for businesses? Is there a broad base of investors and intermediaries willing to support them? Are we getting regulation right?

In other words, do we have the foundations in place to ensure, regardless of economic and market cycles, that New Zealand's capital market can perform its core function of supplying growth capital to businesses and connecting everyday New Zealand investors to those investment options?

The demand for capital -- Issuers

Since the beginning of 2013, prior to Mighty River Power's listing, 34 companies have listed on NZX, raising almost $7 billion in capital. Excluding the gentailers, almost a third of capital raised has been used to grow those businesses.

In the past year, we have seen a resurgence in debt listings and issuances on NZX, with 27 new debt listings representing more than $9.27 billion.

Some terrific businesses have graduated to the S&P/NZX 50 Index including the a2 Milk Company, Comvita, Heartland Bank, Precinct Properties and Xero -- all of which have taken advantage of being listed to cost-effectively raise capital to grow their businesses through secondary offerings.

More private companies and their shareholders are now considering NZX as a viable option for raising capital or selling a stake in their business, which was less common three years ago.

Crowdfunding is also becoming a viable option for capital raising, with 35 smaller businesses so far using that market to raise $25 million.

For businesses at the next stage of development, NZX's NXT market offers a platform for future capital growth, along with a pipeline of companies that will grow to NZX Main Board size.

And there are promising signs that stronger linkages will develop in the next few years between crowdfunding and NXT.

Supply side -- Investors

Growth in KiwiSaver funds under management (FuM) is up 102 per cent to $33.4 billion in the three years to 31 March 2016. There are now 19 (up from 14 three years ago) fund managers in New Zealand with more than $1 billion in FuM and four (up from three) with between $500 million and $1 billion.

It is these kinds of smaller, boutique fund managers that are particularly important to support smaller companies coming to the public markets.

Yet despite this growth, the full benefit of the KiwiSaver funds inflow is yet to be seen in our equity market.

New Zealand Treasury analysis published last year found that across the market, KiwiSaver portfolios were overly conservative, reducing potential future retirement incomes. It found only a small portion of KiwiSaver funds are invested in the New Zealand equity market.

Part of this is a Catch-22 problem: managers see a market that has a limited supply of attractive investment options. On the other hand, some potential listed companies see managers as overly cautious.

Tim Bennett, CEO of the NZX.
Tim Bennett, CEO of the NZX.

Experience offshore suggests that this will change over time as the number and diversity of fund managers grows, and as KiwiSaver balances grow, investors will seek a broader range of investment options.

The past three years has seen a resurgence of global interest in our market, with offshore ownership now at 46.3 per cent.

This is in part due to the relative attractiveness of the New Zealand sharemarket.

But it is also clear that New Zealand is now firmly back on the global investment map, which recognises the growing depth of our listed companies, and the quality of our market infrastructure and regulation.

Tens of thousands of New Zealanders became share owners for the first time through the listings of Mighty River Power, Meridian Energy and Genesis Energy, and we continue to see 1000 or more new brokerage accounts being opened each month.

But there are still practical barriers to direct retail investment in the equity market, including the relatively high cost of providing advice and research, which limits access by smaller investors to the equity market.

Changes to the Financial Advisor regime, currently under review, will be important to ensure that all types of New Zealand investors have access to appropriate financial advice, and ultimately a broader range of investment options.

Infrastructure and Regulation

The much-needed overhaul of New Zealand's legislative and regulatory framework, following the global financial crisis, has helped to restore trust in New Zealand's public markets.

As the frontline regulator of the public market, NZX has made a substantial investment in our regulatory and operational infrastructure, including a robust technology platform and appropriate governance structures, to ensure we operate fair, orderly and transparent markets.

As investing becomes increasingly global, we need to be conscious that financial failures offshore have as much potential to erode this hard-earned investor trust, as do events in New Zealand.

Keep the focus

The resurgence of appetite for raising capital through public listings, a growing domestic investor base, and an effective regulatory environment, all point to the New Zealand market ecosystem being in good health.

The INFINZ Awards celebrate the achievements of the people and firms at the heart of that ecosystem: businesses, bankers, brokers, researchers and advisors.

It is a fantastic industry we work in. But although the overall ecosystem is in good health, we need to be very conscious of the importance of maintaining a vibrant local industry. The biggest challenge for our future is how NZX and the New Zealand market differentiates itself in a much broader and deeper Trans-Tasman capital market.

NZX has an obvious leadership role to play here, to continue to develop and protect our capital market ecosystem.

This includes ensuring private companies see the public market as a option for raising capital; supporting advisors and smaller fund managers who bring those companies to market; and ensuring that distribution and advisory networks are in place to allow all New Zealanders to invest in great New Zealand businesses.

We can't lose focus -- we need to continue to work together to maintain this hard-earned momentum and preserve our capital market on behalf of all New Zealanders.

- NZ Herald

Tim Bennett is the chief executive officer of the NZX.

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