MinterEllisonRuddWatts partner and head of corporate Silvana Schenone.
COMMENT:
Following a strong end to 2020, we have seen significant activity in New Zealand's private and public markets throughout the first part of 2021.
Some deals were reignited after Covid-19 put them on hold, while new opportunities have been captured by eager investors seeking a safe home for their capital.
Investors are cashed up and seeking opportunities
Domestic and international investors are either cashed up or have access to well-priced funding and are keen to invest in well run New Zealand businesses.
Funding is coming from several different sources, including the rise of non-bank funding options that offer significant flexibility. Listed debt, including green bonds, has also boomed in recent years as an alternative source of funding used by public companies.
While private companies remain a key focus for private equity and other professional investors, there is recognition that they don't satisfy all the requirements of sophisticated investors. The opportunities for capital are found in companies with solid foundations and a robust strategy.
High standards and sustainability strategies will attract investment
Although heightened regulatory standards like disclosure, financial reporting and ESG compliance make public companies a more "complex" investment option, these standards also make them an attractive target.
ESG commitments and transparent reporting is part of what large international investors who have publicly committed to a sustainable investment strategy are looking for. For them, this is more than a "PC" approach — it is a very real and values-based business issue. It is increasingly apparent that everywhere in the world consumers, employees and therefore investors, are demanding more from organisations they interact with.
Businesses that lack values beyond maximising shareholder profits or organisations where their products and services have a negative impact on the environment, people or society, are being discounted by consumers and investors alike.
Larry Fink, CEO of BlackRock, the world's largest asset manager with $8.67 trillion in assets, warned in his annual letter to CEO's for 2021 that companies who ignore stakeholders do so at their own peril. Fink wrote: "The more an organisation is able to show its purpose in delivering value to stakeholders, the better able an organisation is to compete and deliver long-term, durable profits to shareholders."
With its remote location from a number of jurisdictions that export capital, New Zealand has benefited from a swift and nimble approach to the digital economy resulting from Covid.
Being a responsible corporate citizen is a valuable brand, building reputation and providing a competitive advantage. This is particularly so for New Zealand organisations who participate in a global economy.
Steady, not booming capital markets
While there is some activity, New Zealand's capital markets have not seen the boom that some predicted for 2020/21. Private equity funds are starting to once again view IPOs as a viable exit strategy, but we have not yet seen the number of IPOs anticipated or needed to reinvigorate our weakening capital markets.
Some of these hopes were born out of predicted listings by central and local government, where some of their assets — if available to the public — would generate a sizeable boost to New Zealand's capital markets. An IPO of that type would allow the public to get involved in the country's capital markets. With the right combination of access and the disclosure ecosystem, it would also support New Zealanders financial literacy.
Covid highlights New Zealand as a safe investment harbour
It is no surprise that technology, healthcare and food sectors remain strong and attractive industries in NZ. More broadly, technology has been an enabler of many transactions in the last year or so.
With its "remote" location from a number of jurisdictions that export capital, New Zealand benefited from a swift and nimble approach to the digital economy resulting from Covid.
Even with the borders closed, and during lockdowns, technology enabled investors to conduct due diligence on companies they were interested in, and complete investments without having "eyeballed" their new business partners. This is particularly true for those New Zealand businesses that weathered the Covid storm and came out with a strong strategy for the next period.
A number of transactions were put on hold in 2020, while businesses responded to Covid, dealing with urgent issues, revisiting their strategy for survival and recalibrating their positions. Boards were meeting on an extraordinary basis and most non-BAU matters that did not relate to Covid were put on hold.
However, businesses are now aiming to catch up with new strategies and ambitious goals for 2021 and beyond. New Zealand's response to the global pandemic highlights our country's unique place in the world and earned us a reputation as an investment "haven".
However, our capital markets remain weak with various 'take private' transactions taking place in the last 12-18 months and few new listings replacing those entities leaving the NZX. No one factor is creating this dynamic — the combination of market size, competing options, availability of cheap funding and regulatory environment all contribute.
Unfortunately, the FMA's Growing New Zealand's Capital Markets 2029 report recommendations don't appear to have made the inroads expected, but remain valid reminders of the obstacles our country faces.
For New Zealand to remain an attractive investment destination — and have a prosperous economy — there is a real need to strengthen our capital markets, for public companies to genuinely address sustainability (ESG) and encourage active participation in the global digital economy.
These are key for NZ companies to be competitive leaders on the global stage. Only then can New Zealand truly be considered a safe home for the significant capital available for investment.
● Silvana Schenone is a partner and Head of Corporate, MinterEllisonRuddWatts.
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