It was one of the most famous early thought leaders, Benjamin Franklin, who said: "There are three faithful friends — an old wife, an old dog, and ready money."
And, while New Zealand is in an enviable position compared with the US and most other countries around the globe, there is no getting away from how important "ready money" has been to Kiwi businesses through the first half of 2020.
The economic shock of the Covid-19 lockdown and international travel restrictions has created an urgent need for cash flows — with listed companies moving quickly to repair and recapitalise the equity side of balance sheets.
The total of more than $5 billion of capital raised on the secondary market in the 90 days from the beginning of April dwarfs what happened in the early months following the 2008 GFC. This access to capital has undoubtedly saved many jobs in New Zealand, and softened the economic shock for our country.
The pandemic has demonstrated the importance of the listed market for New Zealand — not only in supporting Kiwi businesses but also in providing investment opportunities into New Zealand for all investors.
These have reinforced the significant opportunity to develop our listed market to support New Zealand's longer-term growth and success. This is where we need to turn our attention, to create further resilience and sustainable value.
Efficient access to capital
As soon as the magnitude and seriousness of the impacts of Covid-19 was understood, New Zealand companies knew they had to respond quickly. Having access to the necessary capital to protect businesses and save jobs was at the forefront of every board and CEO's thinking.
NZX also moved swiftly, introducing a lift in capital raising capacity to help NZX-listed issuers weather the impacts of the pandemic. This included an increase in the capacity under share purchase plans, which has supported retail participation in these offers, along with measures to allow greater flexibility in the types of offer structures and in the timeframes for financial reporting. These measures were supported by recent rule changes, making it more efficient to raise further capital.
We are certainly seeing the value of access to equity in these markets. Companies in some sectors of the economy that have been hit hardest — including tourism and travel — have been able to access equity capital quickly. Some traditionally strong-performing businesses were able to raise substantial sums, from Auckland Airport's $1.2 billion and $207 million by Kathmandu to a large number of NZX's smaller issuers also being able to effectively access the market for further capital. These included Enprise raising just over $1.1m, Cannasouth raising about $6m, Moa $8.3m, Truscreen $2m, QEX Logistics $3m, Promisia $5m, Chatham Rock Phosphate $2.3m, Wellington Drive Technologies $5.4m and our recent listing, Me Today raising $4.5m.
Our rule changes also introduced a platform for the listing of wholesale debt, which has seen $1.4b listed so far this year. The retail debt market has been a standout performer for New Zealand in recent years but has been more subdued as companies have looked to draw down on bank liquidity facilities in the short term. Nevertheless, the retail debt market has still had $2.7b of capital raised in the first six months of 2020.
The changes we have made also enabled easier listing of funds — this is an area where we see the potential for strong development in the listed market. We have seen $985m of capital raised by funds issuers so far in 2020.
This activity has highlighted the broader opportunity which is available for current private companies to use the listed market to access capital. The Capital Markets 2029 report highlighted an estimated 1200 private companies in New Zealand with annual revenues in excess of $30m. These companies are significant employers of Kiwis and collectively large contributors to the New Zealand economy. It is likely that a significant number of these companies would benefit from further access to capital — either now or in the future — so we see huge potential to continue to develop the listed market to support the growth of these business and, in turn, New Zealand.
Broad investor participation in the market
Alongside the benefits for New Zealand companies in being listed, we have seen a significant increase in liquidity on NZX's secondary markets in the first half of the year, reflecting strong participation from both institutional and retail investors.
Liquidity is a key measure of success for any market and acts as the ultimate protection for shareholders who may wish to trade in, or out, of a position. This vibrant activity has endorsed recent steps taken to develop NZX's secondary markets.
In 2018, NZX introduced pricing changes for its secondary market by removing the fixed trade costs and moving to a variable pricing model consistent with overseas markets. These updates were reinforced by policy measures. The package of changes was designed to promote increased on-market liquidity to improve price transparency and, in the longer-term, drive increased traded value on our markets.
The first six months of 2020 has seen a significant increase in volume and value traded with an average daily value traded of $227m, compared to $150m for the first half of 2019. The trend for increased value traded on-market has continued to rapidly improve with an average 62.4 per cent of value traded on-market year-to-date, compared with 33 per cent in 2015.
The average number of trades per day in the first half of the year was 48,000 trades. To put this into context, the average trades per day in 2015 was 5836. Additionally, NZX has seen its highest 50 days of trade volume all occur since March with a peak of more than 112,000 trades observed in a single day in April.
This rapid and significant increase in volume, tracking at 4.5 times the previous average, has presented some challenges to the technology supporting our market. NZX responded in real-time to these issues and introduced key software and hardware upgrades to increase the resilience and capacity of our technology systems for volumes well beyond the peaks already observed.
There has been a lot of commentary about the increased retail participation in the markets — and this has certainly been a feature — with $930m of retail valued traded in June alone; 17.3 per cent of the total value traded. However, retail remains relatively consistent as a percentage with historical averages, demonstrating the increased trading activity has been from all investor segments.
The level of activity in our share market has presented a positive picture, much of which we see has been supported by the ongoing international interest in the S&P/NZX 50 as a relatively resilient index — by June 30 recovering more than 34 per cent from the low-point of March 2020. We are seeing strengths in the healthcare, the primary and technology sectors — particularly frontier firms with strong international competitive advantages — with companies such as Fisher & Paykel Healthcare, A2 Milk, Pushpay Holdings and Plexure performing extremely well.
An important feature has been that the liquidity for our New Zealand dual-listed companies continues to trade on NZX, with 80 per cent of dual-listed securities being executed via NZX. This highlights the value of the NZX secondary markets for New Zealand companies. Continuing to build and develop a local market in New Zealand is important to retain our sovereignty on key capital markets infrastructure and is crucial to supporting a broader ecosystem within New Zealand's financial services industry.
All of this performance and activity has highlighted that the listed market delivers reliable, liquid, and open access to investment in New Zealand for all investors, so everyone can benefit from the success of Kiwi companies.
Potential for listed market to further support New Zealand
In terms of broader market development initiatives, we are focused on progressing the recommendations of the Capital Markets 2029 report. Given the value of listing which has been highlighted in the current environment, our focus is on promoting the market to other companies who may need to access capital or to owners who may want to release capital for other purposes.
A strong pipeline of listings is building across equity, debt and funds as companies recognise the benefits of having access to capital and look to attract the large pool of investible cash that is available. We expect Direct Listings — where companies seek a listing without raising capital immediately — to be a pathway of choice for accessing the listed market.
A Direct Listing allows a company to access a liquid secondary market immediately to trade its shares, and allows access to capital after an initial stand-down period.
NZX has been consulting on potential changes which would clarify the regulatory treatment of these listings to support this pathway to market — recognising the different risk profile from an IPO (Initial Public Offering). We are encouraged by the opportunity to promote this pathway to market because it allows a broader range of entities to promote a company for listing. The absence of an initial capital raising also reduces the costs of a Direct Listing.
The listed market also offers an avenue to support the New Zealand Government's balance sheet, to take the strain off taxpayers by directing available pools of non-Government funding to areas that need additional capital.
The Napier Port listing last year is an excellent blueprint for what is possible in this space — with a local New Zealand listing allowing the company to raise $234m of equity capital, which is assisting the funding of a new wharf development that will flow through to the regional economy. This was achieved while allowing its owner Hawkes Bay Regional Council to retain a 55 per cent majority interest in the company, while prioritising the interests of local iwi, ratepayers and Port staff by inclusion in a priority offer.
The need for "ready money" is a constant, and fundamental to the strength of our economy.
Covid-19 has both tested our listed market and revealed the compelling value that can be delivered when we connect our businesses in need with private sector capital, and open up new investment opportunities for all Kiwis into New Zealand. This is not just about survival, but growth and creating opportunities for the future.
- Mark Peterson is chief executive of the NZX.