Capital Markets: Where has the first third of the year gone?

Andrew Matthews (left) and Michael Pollard.

As everyone knows, 2014 was an incredibly strong year for New Zealand's capital markets with 16 initial Initial Public Offerings (IPOs). On the back of that, expectations were very high for 2015. Some commentators predicted more than 20 IPOs, expectations were high for Mergers and Acquisitions (M&A) driven by a seller's market combined with lower funding costs, and all eyes were keenly watching NZX's new NXT market.

A third of the way into the year, announced deals have been fewer than anticipated and the process for getting deals done slower than expected. We've seen just one IPO (Fliway), although there are still a number being talked about in the market and it's fair to say that expectations remain high. And there's good reason for this; the conditions should be favourable.

There has been a substantial reinvigoration of New Zealand's capital markets on the back of the Crown privatisation process and last year's IPOs. Listed companies also have the opportunity to use high valuations to raise further capital (for war chests, deleveraging, acquisitions or to accelerate capex for future earnings, eg Precinct Properties' recent raising) and corporate lending remains competitive. KiwiSaver coffers keep growing and need to be deployed. Private equity (overall) is both a buyer and a seller, with some funds needing to realise assets and others needing to spend.

Our impression is that the value gap between buyers and sellers is lessening. New Zealand is still seen internationally as delivering some great assets and great value. We saw this with Accel Partners investing US$100m in Xero earlier this year.

So what does the rest of the year look like?

We expect things to pick up. With current conditions, the assets in play (or under consideration) and the activity to date this year, we believe we are on a precipice of corporate activity. There are a number of companies that have publicly announced their intention to entertain a capital raising or sale process, including Fisher & Paykel Finance, Silver Fern Farms and Pumpkin Patch. And we know there are plenty more keeping their cards closer to their chests.

Capital markets are still viewed as a strong exit option but will likely be considered alongside a dual-track M&A process. This will allow sellers to test all options and drive M&A competitive tension against that in the public markets. Rumours in Australian media reports put Vitaco Health, a Next Capital company, in this category. Carter Holt Harvey is being tipped for IPO this year.

Companies coming to the public markets will need to continue to demonstrate value and expected growth paths. A level of pricing scepticism may, to an extent, be present with a significant number of recent floats currently trading below their listing value (in an environment where the NZX50 index has increased).

Investors will want prospective financial information -- there was protest when Orion Heath proceeded without it. However, where the market hasn't been satisfied about value, it hasn't been shy to make that known (for example, the proposed float of HirePool last year).

Secondary capital markets sell-downs will continue as selling shareholders in IPOs come off their escrow arrangements.

Takeovers will pick up where the share price doesn't reflect the true value. In the past 18 months or so, things have been fairly quiet (with prices buoyed by the strong capital markets) but we've also seen an approach on Abano, the takeovers of Lyttelton Port Company and Turners Group, an,d most recently, it looks like Horizon Energy will be privatised by Eastern Bay Energy Trust. Scrip takeovers will be a great option for a listed buyer, given the availability of the relatively recent quoted financial products exemption under the Financial Markets Conduct Act.

NXT is on the horizon.

Everyone is waiting to see how this launches, with a strong desire that the first few listings fly and demonstrate the value the market delivers. There is lots of chat in the media about possibilities, including Straker Translations, and Results.com.

Others like Invivo wines, Fronde and Booktrack have been mentioned but are understood to be less likely for anything immediate.

Private equity funds will continue to be active. At the right price, they are currently buyers and sellers. Several funds will try to realise assets they've held for a while, aiming to deliver returns to their investors. Speculation continues as to the likes of HirePool and Wherescape (two possible IPOs from 2014 that didn't eventuate). At the same time, some PE funds (particularly in Australia) have a lot of dry powder and are looking to deploy. All options are on the cards here - secondary private equity sales, trade sales and IPOs.

Overall, the outlook for the remainder of 2015 is strong.

• Andrew Matthews is a senior associate and Michael Pollard a partner at Simpson Grierson.