The future of NZ's capital markets lies in building on our economy's unique strengths and recognising the needs of local success stories — not in trying to match what other markets are doing.
For a considerable period, and certainly since the Capital Markets Development task force released its report in December 2009, New Zealand has been focused on developing a healthy listed capital market. It continues to make substantial improvements but the going remains tough.
Many will view 2017 as a big step backwards, with only one company joining the NZX through IPO (Oceania Healthcare), and eight companies leaving — predominantly through takeovers such as those of Opus, Fliway, Trilogy and Airwork and the high profile insolvencies of Pumpkin Patch, Wynyard and Intueri.
On top of that, the departure of Xero was a straw which some hinted might "break the camel's back", given the symbolism of one of our most celebrated success stories leaving for more liquid markets overseas.
There has only been a single IPO announced in 2018 — Salus Aviation, with a raise of only $35 million. Meanwhile, the NZX has already lost CBL Insurance (with market capitalisation of over $750m) and takeovers activity looks pretty buoyant with Tegel looking likely to leave the NZX, shedding another $400m from the index.
Review of market structure
Like all things, for growth to occur, the environment needs to be able to support and promote that growth. To its credit, the NZX is now in the midst of a full review of market structure and regulation in an attempt to create a platform that meets the ever-changing demands of both investors and issuers.
The NZX's proposed changes, which are designed to streamline board structure, reduce compliance costs, bring issuers more into line with international norms and support better product diversity, are a good indication that new ideas are being explored to further develop our listed capital market.
It's a delicate balance and not the magic bullet, but NZX has the right approach. Some of the key underpinnings of the new approach are below.
A focus on agri-business
In our view, any predominant focus on like-for-like competition with ASX and even with much larger markets further afield, will undermine the opportunity to capitalise on New Zealand's strategic advantages such as agriculture.
The NZX appears to recognise this with innovations such as its Agri-Index, which should place a focus on the country's stellar international reputation for primary industries — a supplier of high quality, responsibly produced products which feed the world.
While the index is dominated by Fonterra and a2 Milk at present, it makes sense for our national capital market to be focused on attracting capital into businesses that are lining supermarket shelves on the other side of the planet with New Zealand's meat and dairy products.
Adapting to our "start up economy"
An opportunity also exists to provide a suitable ecosystem for small, fast growing Kiwi businesses from all sectors. There have certainly been plenty of suitable candidates — in addition to the obvious example of Xero, last year we saw Power By Proxi, the world's leading creator of wireless charging products, sold to Apple.
Rocket Lab would have been another candidate for listing but its path is a clear blueprint of how our modern success stories have been finding their capital. Its share register reads like a who's who of global venture investing. It took money from NZ investors in its early stages but was there ever really any question of it listing in New Zealand?
Unfortunately from the listed capital market perspective, we've recently had a number of New Zealand's leading start-ups incubate locally and then move straight to an ASX listing — examples include Volpara Health, Croplogic, Martin Aircraft and Neuren Pharmaceuticals.
Creating local opportunities for retail investors to get behind the next Kiwi company taking on the world, or to support an established name which is taking New Zealand global, would certainly invigorate the listed market.
We acknowledge the challenges associated with listing companies below a certain scale, which makes it difficult to view NZX as a home for many of these growing companies before they've had a chance to take in overseas capital.
However, NZ investors could be permitted to follow NZ companies through a secondary listing on NZX or via a "depository receipts" structure like that in the US, which could permit portions of overseas listed NZ companies to trade via NZX. The changes being considered by NZX certainly indicate a move in the right direction.
The infrastructure deficit
Our country's challenges in funding crucial infrastructure — paying for the houses, roads and "3 water" solutions which New Zealand's rapidly growing population needs — offer another opportunity to create new vehicles for investment and to drive business through the NZX.
The infrastructure "can" has been kicked down a very long road and, as the Government has acknowledged, it is time to develop structures which will work to attract the type of investment necessary to fund these projects. Retail investment (via the NZX) can play a role as day one investment and as an exit opportunity (via IPO) for those wholesale investors who put the money in upfront.
We are pleased to see that NZX's exposure draft listing rules provide ample opportunity to list the fund structures through which infrastructure investments are likely to be made.
A step in the right direction
The NZ listed capital market is at a critical juncture in its development, and we are pleased to see the NZX apparently targeting the opportunities available.
The developments, which we hope will flow from the enhanced flexibility that NZX is proposing, should drive money into New Zealand's businesses and provide attractive investment opportunities to long suffering retail investors.
It should also deliver NZX the status it deserves as the gateway that opens New Zealand's economy to the world. Ultimately, of course, quick, wholesale changes cannot be made to the delicate ecosystem that is our listed capital market.
An important feature is scale and liquidity, which will only come with time and increased funds under management invested in the NZ market.
It is important to do what we can to facilitate these developments by setting our capital markets in the right direction.
Potential spin off from the tightening OIO net
As a closing comment, perhaps there is a silver lining for the NZX flowing out of the Overseas Investment Act.
The regime has become increasingly cumbersome, and with a left leaning coalition Government in place, a sense of unease has developed in the investment community around the ability to sell more sensitive rural or agri assets to overseas buyers — or at least to do so without waiting six months for clearance.
It could get worse — gridlock could flow from generally bringing residential property under the regime, as is currently proposed.
These factors are certainly increasing the appeal of the IPO pathway.
eight companies leaving the NZX in 2017
a single company joining the NZX through IPO in 2017
a single IPO announced in 2018 — Salus Aviation, with a raise of only
● Michael Pollard is a senior partner in Simpson Grierson's corporate team.