Slade Robertson: Ambitious capital markets review timely as big companies exit

COMMENT:

The Financial Markets Authority (FMA) and the New Zealand Stock Exchange (NZX) are undertaking a review of our capital markets.

The review, called Capital Markets 2029, is ambitious and is designed to deliver a 10-year growth agenda and vision for the sector.

The timing couldn't be better.

Concerns have been raised about the future viability of the NZX if takeovers of companies like Trade Me continue and others follow Xero and shift their primary listing to Australia.

The value of the 50 largest companies listed on the NZX is close to $95 billion, which compares favourably to the value back in early 2010 of $38b. This growth has been impressive with the NZX50 Index generating a return for investors during that time of more than 170 per cent, while Australia's ASX200 Index and the US S&P500 Index are up 77 per cent and 125 per cent respectively.

On this basis success can be claimed, but a look under the bonnet of the NZX quickly reveals that a number of challenges exist.

The ideal outcome for a country's stock exchange is that it is a functional platform which encourages businesses to list their equity to facilitate growth strategies and optimise their capital structures.

If this framework is met then we typically see a strong pipeline of new businesses, across a range of sectors, looking to access the public markets with the size and make-up of the market being broadly representative of the overall economy. Unfortunately in both these objectives the NZX is falling short.

In March 2010 the value of the NZX50 Index as a percentage of New Zealand's economy, as represented by its GDP, was 20 per cent. Today it is closer to 34 per cent. This growth appears positive but when it is compared to many of our major trading partners we lag significantly behind.

In Australia the ASX200 Index relative to GDP is 99 per cent, in the US the S&P500 Index is 124 per cent and in the UK the FTSE100 Index is 103 per cent. Our relative lack of representation highlights that many New Zealand businesses do not consider the public markets an optimal avenue to operate through.

This perspective is further evidenced by the recent deterioration in new listing activity.

Outside of the lift in Initial Public Offerings (IPO's) during the government's privatisation process in 2012/2013, the number of deals presented to investors over the past couple of years has been alarmingly low.

In fact, outside of the $200 million IPO of Oceania Healthcare in May 2017 there have been no new companies brought to market. The other big issue is that across the companies which are currently listed here, there is a poor level of sector relevance to New Zealand.

In an economy where Agriculture and Finance are large contributors to activity, the investment options into these critical domestic industries are limited.

Encouragingly the FMA and NZX have decided to take a proactive approach to understanding what road blocks exist. Their objectives will be to determine if the regulatory settings are appropriate and to determine through engagement with corporate New Zealand and different investor groups what improvements can be made.

In an environment where the success of the New Zealand Superannuation Fund and KiwiSaver is having a major impact on our domestic savings regime, the need for progress from this review is high.

This requirement is also being supported by the fact that the knowledge and understanding of our capital markets has recently lifted materially for all New Zealanders (as a consequence of KiwiSaver).

Local exchange worthwhile

Previously there have been suggestions that a merger between the NZX and an offshore exchange could make sense. Despite the mechanics of such a transaction being achievable, there is a lot to be said in favour of the proposition that capital markets need sovereignty.

The view that the regulations and the savings source should be governed by the home country have merit. This topic along with many others will undoubtedly reappear in discussions concerning our markets and the solutions that the Capital Markets 2029 review is seeking to identify will be challenging.

Among the options that will surely be considered should include the privatisation of other government and local government assets (based on the considerable success of the partial privatisations of businesses such as Air New Zealand, Meridian Energy and Mercury).

Also up for debate is the listing of the New Zealand operations of at least one of the large Australasian banks (the likelihood of this has increased subsequent to the proposal by the RBNZ to lift the required capital of NZ banks).

Another issue that we often hear in support of businesses selling to Private Equity as opposed to the public markets is that the compliance burden associated with a listing on the NZX is obstructive for both the company and its directors.

Great care is needed in addressing this issue as the compliance framework was developed to protect investors but it appears that a higher degree of balance may be required.

This review will need to consider a range of views from a range of different interest groups but regardless of this complexity we should all be encouraged by what the FMA and the NZX are ultimately looking to achieve.

- Slade Robertson is managing director of Devon Funds Management