New Zealand needs to decide whether it's acceptable for so many companies to be snapped up by overseas private equity firms long before those companies are developed enough to list on NZX, says Financial Markets Authority chief executive Rob Everett.
"If all the best investment opportunities are taken up by private equity, what's available for listing, more often than not, will have had all the juice squeezed out of it," Everett told BusinessDesk.
NZX has tried a number of things to try to encourage smaller and earlier-stage companies to list by establishing a junior board.
But three iterations – the New Capital Market, Alternative Market and the short-lived NXT Market – tried since early 2000 have all failed to fire.
NZX finally threw in the towel last year when it decided to fold the two remaining junior boards, AX and NXT, into the main board.
"That, in many ways, is the crux of the issue," Everett says.
"If you look at the New Zealand economy, most of the companies that are being bought by overseas private equity are a long way from being ready for listing," he says.
It's this situation, and the consequent dearth of new equity listings on NZX, that have inspired the current formal review sponsored by NZX and the FMA. It is designed to try and revive listings and called Capital Markets 2029.
Not only are new equity listings on NZX almost non-existent – there were two last year, neither of them initial public offerings, and two in 2017, only one of them an IPO – but takeovers and business failures mean the number of equity listings has dropped steadily year after year, most recently to 138 in December from 173 in December 2015
But Everett says the review needs to take a much broader look than at the impediments to listing.
"You can't have a conversation about more listings unless you look at the entire ecosystem," he says.
Another attempt to generate early stage capital to fund new businesses was including crowd-funding rules in the Financial Markets Conduct Act passed in 2013.
Everett says legislators took "quite a brave step" creating the crowd-funding regime but it hasn't taken off in any size.
An obvious question is whether merchant bankers and fund managers are less willing to take risks than they once were.
TIL Logistics, with a current market capitalisation of $119.2 million, listed in late 2017 via a backdoor listing because its owners were told there was no support for an IPO.
TIL's size and operations are reasonably comparable to those of Mainfreight, which raised $57 million by selling shares at 96 cents each in its 1996 float. Mainfreight has since expanded globally and its market capitalisation is now $3.2 billion, or $32.01 per share.
TIL had already demonstrated an appetite for growth before its listing.
So why was Mainfreight's listing possible in 1996 but TIL's wasn't in 2017?
Certainly, the evidence of recent rights issues from Fletcher Building's $750 million issue last year to Gentrack's $90 million and Seeka's $50 million issues appears to show that underwriters will only take "risks" when the outcome is a sure bet that could be achieved without underwriting.
Everett says he has sat on the merchant banking and funds management side of the fence and notes the New Zealand firms are small by international standards.
"It only takes one or two to go wrong" and potential New Zealand underwriters would be severely damaged, if not wiped out.
The resources required to support both early stage capital raising through to an NZX listing are matters the review needs to examine, he says.
"My impression is that there's a fairly strong sentiment among New Zealand investors that ideally they would like to be supporting the New Zealand economy – people want to support New Zealand businesses," Everett says.
"At the moment, the opportunities for them to do so aren't there because New Zealand businesses aren't listing and there aren't mechanisms further down the chain."
Now is a good time for such a conversation, he says. He would have preferred to get the review up and running last year, but the FMA and Reserve Bank of New Zealand were distracted by their reviews of the banking and insurance industries.
But the delay was also due in part to the time needed to find the right people available to run the review – former FNZC head of investment banking Martin Stearne is leading the review with accounting firm EY providing support.
"There's been a fair amount of warming up before we got to this."
The results are expected to be published in the September quarter.
Everett says it is important to get the review launched before the next election in 2020.
"I think we've got time to get something meaningful done this year before people start to get distracted with elections."
The problem isn't isolated to New Zealand – the United States and Britain are having similar conversations about how to keep up a flow of new listings and to keep their stock exchanges growing, he says.
"Most stock exchanges are struggling with how do we attract new listings, how do we keep growing."
One school of thought is that the rise of exchange-traded passive funds - and NZX manages several such funds - may be a reason smaller companies are starved of capital. Smaller companies typically don't qualify for inclusion in the indices such funds track.