NZ market's growth will outstrip Oz, UK

Fuelled by Government plans to partially privatise state-owned power generator and retailer Mighty River, and by Fonterra's proposed share trading among farmers, New Zealanders can expect significantly enhanced capital markets by the end of this year.

We believe this growth, particularly in equity capital markets, will outstrip that of Australia and Britain.

Better still, the momentum is expected to continue during the next 24 months, underpinned by the planned sales of minority interests in SOEs Mighty River, Meridian, Genesis and Solid Energy.

The Government's mixed ownership programme has stimulated interest in IPOs from a mix of private equity-owned assets and privately-owned mid-size businesses.

Much of this interest has been sparked by the successful floats of Trade Me and Summerset, and the demerger of Telecom and creation of Chorus at the end of last year.

In fact, the value of New Zealand IPOs for the last quarter of 2011, raising US$388 million, exceeded that of Europe, including Britain, where US$217 million was raised in the same period.

We are optimistic about a second wave of activity in the New Zealand IPO market from the third quarter this year. The Summerset float has demonstrated a window for private equity selldowns through to the public capital markets. In Christchurch, in particular, commercial property owners, flush with post-quake insurance cheques and uncertain about the city's rebuild plans, are itching for yield.

Fonterra may offer another opportunity for private investors. The Dairy Industry Restructuring Amendment Bill, enabling share trading among farmers, has passed its first reading in the House, and Fonterra's shareholders are due to vote on the final proposal on June 25.

A previous vote, in 2010, was 89.85 per cent in favour.

Of particular interest to non-farmer investors will be the proposed Fonterra Shareholders' Fund where NZX would manage a process of trading investment units, allowing farmers to sell down their equity in the co-operative. These units would attract dividends but no voting rights.

In addition to opportunities in public equity markets, private equity activity has soared to pre-GFC levels, with total investment increasing by 88 per cent last year to $554 million.

But the global IPO market is a different story.

Ernst & Young's Capital Confidence Barometer, released at the end of last month, shows corporate confidence in capital markets has risen globally in the past six months but has yet to translate into significant investment activity.

The report was based on a survey of more than 1500 executives worldwide, including 146 from Australasia.

The most cautious respondents - those focused mainly on capital preservation and survival - have dropped to 13 per cent from the 30 per cent recorded in last October's survey, and those at the other end of the scale - companies focused on capital raising - have risen from 15 per cent to 25 per cent. But most of this activity has involved refinancing rather than IPOs.

Of those respondents focused on capital raising, 60 per cent say cash is likely to be the source of deal funding during the next 12 months.

But debt and equity funding are back on the table, with 30 per cent of respondents saying they're considering debt funding (up from 11 per cent in October 2011) while another 17 per cent say they plan to use the equity markets.

Behind much of this sentiment is uncertainty about the resolution of the eurozone sovereign debt crisis - a risk prospective investors must still factor into their decision-making.

Europe's debt crisis deeply impacted global IPO activity in 2011. In terms of capital raised, the 2011 figure (US$170 billion) was 40 per cent lower than 2010 (US$285 billion).

The first quarter of 2012 shows a similar trend.

Ernst & Young's Global IPO Update, released at the end of March, revealed a sharp fall in IPO activity in the first three months of this year with 47 per cent fewer deals and 69 per cent less capital raised than in the equivalent period in 2011.

Compared with the last quarter of 2011, there were 38 per cent fewer deals and 51 per cent less capital raised in the first quarter of 2012.

This year Asia-Pacific issuers have been global market leaders, both in the amount of capital raised (43.4 per cent ) and the number of IPOs (59.2 per cent).

The Shenzhen Stock Exchange was the most active, with 37 deals (23.6 per cent of the total number), followed by the New York Stock Exchange (20 deals, comprising 12.7 per cent of the total) and Hong Kong (13 deals, comprising 8.3 per cent of the total).

By the amount of capital raised, New York was the star performer, raising US$3.9 billion (27.7 per cent of global proceeds) by hosting nine of the top 20 IPOs. Shenzhen was runner-up, with US$3.1 billion (22 per cent), followed by the Shanghai Stock Exchange which raised US$1.5 billion (10.2 per cent).

Globally, the markets will continue to be affected by eurozone uncertainty in 2012.

But our research indicates a significant pipeline of private companies worldwide that are waiting to go public as soon as conditions improve.

Andrew Taylor and Gareth Galloway are partners at Ernst & Young