Floats drowned by flood of private cash

Investors have been well rewarded for putting money into share floats over the past three years.

Despite the publicity surrounding the failure of Feltex, most initial public offerings (IPOs) since 2004 have done well, some spectacularly so.

Excluding two NZX trade funds and local listings of offshore businesses, 24 local companies have listed on the NZX's main board and the NZAX alternative market since 2004, according to figures collected by the Business Herald.

Of the 16 companies that have listed on the NZSX, 12 have outperformed the market's headline index if you add their share price gains to any dividend payments.

But despite the strength of most IPOs, companies are disappearing off the sharemarket faster than they're being replaced.

With cashed-up crews of Australian corporates and private equity freebooters sailing away over the horizon with an increasing haul of attractive New Zealand businesses, the sharemarket needs new blood in the form of initial public offerings (IPOs) like never before.

"We want to see more this year and next year. You just want to have a choice," says Fisher Funds Management's chief investment officer Warren Couillault.

"As a market you do need lots because it means things are healthy and vibrant."

However, the failure of Feltex, which came back on the market in a 2004 IPO, may have left a bad taste in the mouths of many investors, especially mums and dads, says Couillault.

Issued at $1.70 in June 2004, the company's shares are now worth nothing, although shareholders did receive 15c in gross dividends during the carpetmaker's journey to oblivion.

That, with finance company failures this year, explains why market operator NZX's trading figures indicate retail investors are avoiding the market, he says.

Nonetheless, those investors who picked the best floats have reason to celebrate.

Pumpkin Patch listed five days after Feltex in 2004, but has been one of the best performers. It raised just over $100 million through shares at $1.25 and closed at $4 on Thursday. It has paid out 24.3c in gross dividends, giving those shareholders who have held the stock since it listed a 240 per cent gain.

But 2004's real standout has been New Zealand Finance. It raised $2.9 million through the sale of new and existing shares at 30c each, mostly to retail investors. On Thursday, those shares closed at $1.45. With the just under 2c the company has paid in gross dividends over the interim, investors are looking at a massive 389 per cent gain.

The company is now, with its Australian partner Liberty Financial, mopping up the remaining shares in another of the class of 2004 - Mike Pero Mortgages.

The joint venture is compulsorily acquiring remaining MPM shares at $1.10, which for the holdouts from the original Mike Pero listing would have given a 28 per cent gain, including dividends.

Radio communications firm Team Talk's shares have come back from their highs earlier in the year but are trading well above their issue price and, with the company's generous dividend payouts, they have given an 83 per cent gain.

Top performers of 2004 also include Tony Falkenstein's Just Water on the NZAX, with a gross return of 128 per cent, Dominion Finance, with just under 74 per cent, and Fisher Funds Management's Kingfish fund. Including the gains by the warrants issued with Kingfish's shares and dividends, it has gained 70 per cent.

The other actively managed local investment fund that launched in 2004 was Salvus, but it has not fared so well. Although it has paid out just under 7c in gross dividends, its shares issued at $1 closed at 84c on Thursday, giving investors a return of minus 10 per cent.

Apart from Just Water, 2004's NZAX listings have been poor performers, with Southern Travel, Eastern Hi Fi and Solutions Dynamics giving negative returns of 69 per cent, 41 per cent, and 30 per cent respectively.

Last year, not counting the predominantly Australian company Goodman Fielder, the four listings included what NZX head of markets Geoff Brown believes may have been a temporary showstopper, the $589 million Vector issue. That's money that might otherwise have gone into smaller and more numerous issues, he says.

While not making spectacular progress, Vector and the other NZSX listing have outperformed the market's headline index, gaining 15 per cent and 13 per cent, including dividends.

The drought of IPOs this year has been offset, however, by the success of the Delegat's and Rakon listings.

Since its debut Delegat's has gained more than 73 per cent, including a 2.4c dividend payout.

As of Thursday night, investors in Rakon's May listing had doubled their money in little over five months.

Nevertheless, it's hard to go past the fact that since 2004, the output of NZX's IPO pipeline has slowed from a stream to a laboured trickle.

But Brown is clearly peeved at what he believes is a facile and widespread perception. "Where I see the media, you guys, you look at these [IPOs] and say 'you had a great year in 2004 and you haven't done so well since'," he bristles.

"There tends to be a focus of attention on the number of IPOs. I think it's just as meaningful to look at the amount of capital raised. Really, the challenge for us is about the abilities either of existing or new issuers, debt or equity, to raise capital."

Brown does have a point. A large amount of capital has been raised on the NZDX debt market this year, as the Business Herald reported last month.

But the returns to be had on the less well-understood and illiquid debt market are not much higher than those offered by bank deposits right now.

The investing public and institutions still have an appetite for somewhat riskier, but generally more rewarding, equity investment opportunities which, without pointing the finger at Brown and the NZX, appear are a little thin on ground.

"It always goes in cycles," says Fisher's Couillault. "You always get a flurry then it dies down for a few months and companies leave the exchange or merge or get taken over, and then it comes back again in a year or two."

But others, such as Brook Asset Management's chief investment officer Andrew White, believe the scarcity of IPOs is an issue.

As for why listings have slowed, White is unequivocal: "The real theme of 2006 and late 2005 has been the emergence of private equity."

Much as private equity has been creaming off some of the New Zealand sharemarket's choicest companies, it has also, with great fists full of cash, been accosting the owners of attractive unlisted companies before they make it to market.

"The listed market is potentially becoming the second choice," says White. "Generally you're seeing private equity with its lower global cost of capital, and the ability to gear, paying higher free cashflow multiples, particularly for businesses that have got a reasonable surety of cashflow."

With the globe awash with private equity funds looking for a home, New Zealand and Australia are attractive destinations.

As a result, rather than business owners looking to just the listed market for capital or to exit their holding, "dual processes" are now increasingly common.

Yes, private equity has had an effect on the number of listings over the past couple of years, says NZX's Brown, but he also believes other factors are at play.

"In part it's private equity but in part it's also that the banks are very keen to lend, or seemingly much keener to lend to the corporate sector."

So will we see the New Zealand market wither for a lack of new blood?

Oliver Saint of the Shareholders Association thinks so. "I'd like to be positive, but I can't see it ever improving".

Others, including White, are not so pessimistic. For one thing, he expects that at least some of the companies now in private equity hands will eventually find their way back on to the market, in the "traditional cycle" of private equity ownership.

"Goodman Fielder is a classic example, that cycle will continue."

Other commentators are not so sure. White believes that the private equity phenomenon will die down when global interest rates rise.

In terms of new blood, Brown's view - endorsed by others - is that despite the small size of the New Zealand economy, there are still plenty of companies suitable for listing.

"We have in excess of 300,000 companies. If you look at those with revenues of $10 million or more that comes down to about 35,000 ... but that is still very large.

"We have 150 domestic companies listed, which is about 4 or 5 per cent of those. As an eternal optimist, I say there's 95 per cent of suitable companies that are not listed.

"When you have a look at the 100 largest companies, about one-third are listed, about one-third are overseas-owned and the remaining third are either government-owned or primary sector co-operatives.

"The emphasis for us when identifying large companies has to be in the rural sector or government-owned or controlled assets."

The market's overall price-to-earnings multiple of 14.5 has never been higher, he says.

"So really for companies if they were looking to take advantage of that, now is the time to do it."

Good crop of IPOs predicted

The eventual tally of IPOs for this year will be healthy, says NZX head of markets Geoff Brown.

"Below the peak of 2004, but encouraging enough in its own right" is his prediction.

The publicly discussed prospects for the next couple of months are Fisher Funds Management's Barramundi fund, Pike River coalmine and the Kermadec property fund.

"They will raise about $280 million, which will make the total capital raisings about $660 million just in terms of equity alone."

Beyond that, "It's a day-by-day proposition that's difficult to predict."

Companies expected to list within the next year or two include New Zealand Pharmaceuticals and catalogue retailer Ezibuy. PGG Wrightson has also talked of plans to raise more than $100 million for farming in Uruguay.

"The pipeline is very healthy. Aside from 2004, it's as good as it's looked."