Just a few years ago, the only way a New Zealand entrepreneur could get investment in their business was to "pick up the phone and call the local rich guy", muses Enterprise Angels executive director Bill Murphy.

Things are vastly different today, he says. Entrepreneurs have grown sophisticated, showing good market knowledge and thorough preparation when they hook up with the many investor groups that have emerged with an appetite for risk.

But not all is peachy in New Zealand's capital markets sector, say some observers - and the problem isn't a lack of capital.

There's no shortage of money available for investment in this country, says Tim Preston, principal of CM Partners, independent corporate advisers to small and medium-sized enterprises (SMEs).

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What's lacking, he says, are opportunities, or funds, for that capital to be allocated to the SME and emerging company sector.

Small enterprises with up to 20 employees make up 97 per cent (487,402) of all New Zealand businesses and contribute an estimated 26 per cent of GDP, according to the latest government figures.

Preston says the problem is structural.

"The whole structure needs to be fixed – from the funds that need to be allocated to these sectors, to brokers being able to recommend stocks even if they don't research them, to regulators who make it very hard to invest outside the mainstream.

"There's a real combination of factors conspiring against that capital being allocated."

Tauranga-based Murphy says New Zealand has a problem in continuing to fund companies that have grown beyond needing the support of just angel investors, but are not big enough to list on the stock exchange - widely seen as companies with a value of about $100 million.

"The big problem in New Zealand is the shallowness of the capital market," says Murphy. The angel investment sector here is stronger than Australia's, he says, but there is no venture capital market here to speak of.

While he says there are no hard demarcation lines, venture capitalists are the people you look to when you need to raise $1.5m-plus for growth.

"A lot of money is sprayed around new investment opportunities but some of us feel we should be focusing on, and retaining, those funds for the absolute best opportunities to be able to provide the funding to take them through their journey," he says.

That shallowness was highlighted in a recent Herald story about Waikato-based biotech company Synthase, which aspires to be a "resilient and enduring New Zealand biotech company" that isn't lost to this country when an overseas buyer with deep pockets comes along.

But in the next breath, Synthase's principals said they planned to list the company on the ASX in a couple of years to raise further capital for human drug development.

Why Australia? Because, said Synthase, in New Zealand it would be too hard to raise the $15m the company needs to progress to that next stage.

There's plenty of money out there looking to invest in small companies but the problem is how do you do it?

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"NZX doesn't have the liquidity and New Zealand investors don't favour life sciences companies, so valuations are depressed, you don't get liquidity and your stock stays stuck," said Synthase chief executive Greg Moss-Smith.

"Australia has a significant biotech industry – the ASX has over 200 listed biotech companies, and they come from other parts of the world to list there."

Brian Gaynor, head of investments at Milford Asset Management, which has more than $6 billion of funds under management, agrees that biotech companies don't capture much interest here but says the issue is lack of understanding, not lack of cash.

"There's plenty of money out there looking to invest in small companies but the problem is how do you do it?," he says.

Take, for example, KiwiSaver funds, today worth about $50b in total.

The companies those funds invest in need to be on the stock exchange, Gaynor says.

"This is because KiwiSaver funds are not locked away, people can move from one provider to another. If you're invested in a company that's not listed and you want to take money out of the fund, you may not be able to sell your shares [to do so] because it's not listed. It's much easier for major funds to invest in companies that are listed."

Another problem is the NZX, he says.

"The stock exchange has contracted dramatically over the last 30 years - from 55 to 60 brokers down to four. You need brokers and investment bankers to bring these companies to the market, and be prepared to do the work to get them listed.

"The brokers here are just too big. They want the big deals. With a small company worth $50 million wanting to list, they're just not interested, so not prepared to do the work."

Gaynor says a "huge" increase in listing regulations also means that many funds, particularly private wealth and discretionary funds, cannot invest in companies unless they have research reports to back up their decisions.

"And brokers just aren't doing the research on smaller companies. Whereas in Australia you have 70 or 80 brokers and they do cover small companies and biotechs and they do write reports on them.

"That helps encourage companies to list because research analysts know about you and you get covered in the media."

The NZX is the conduit between people with money and companies needing it, but, says Gaynor, "we don't have a very robust stock exchange".

"And we don't have other mechanisms that allow the different parties to get together in a way that's satisfactory to both.

"Our capital markets aren't working as well as they should where investors meet companies and they're not working as well as they do in other countries."

It's very difficult for anything under $100m in New Zealand to be able to list on the New Zealand sharemarket.

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He acknowledges reform under the current NZX regime is "starting along the right path".

"But it's going to take a hell of a long time."

Private equity investor Nigel Bingham, managing partner of Pencarrow Private Equity, would suggest that fund managers like Gaynor's Milford are part of the problem.

"It's very difficult for anything under $100m in New Zealand to be able to list on the New Zealand sharemarket. In Australia, companies under $100m seem to be able to list. I don't quite know the reason but a bit of it is to do with the fact we have a very thin asset manager market.

"For whatever reason, they can decide if they're not really interested in looking at a business under $100m for listing. If five asset managers in Australia don't like an offering of, say, $50m, that doesn't matter because the offerer can offer to a whole bunch of others.

"Here, if you have five asset managers who aren't interested, you're probably dead in the water.

"What we're told about our portfolio companies is that we need to drive them north of $100m before we have any chance of getting them listed.

"The interesting thing is that once we do start to drive them over $100m, there's almost this magic line. We start to get all this huge inbound interest from overseas companies …wanting to buy the business off us."

Bingham says there are two things to consider about listing: the cost and the risk.

The rules say the aspiring share issuer has to use an investment bank, with all the associated cost.

"What you don't want to do is get to the end of that process and find the fund managers have rejected it. It's a failed issue. You've borne all the cost and ended up with nothing."

Pencarrow has invested more than $500m of equity capital in mid-sized New Zealand businesses. An active investor which takes board seats and helps drive and influence growth alongside a company's management team, Pencarrow's investment successes include Icebreaker, The Collective, Netlogix, BeGroup and Seequent.

Bingham says Pencarrow is interested in companies with a value as low as $20m, and is "agnostic" about the sectors it invests in – but its bottom line requirements are that companies must have a "growth thesis" and a strong management team that believes in that thesis.

The firm gets its money from a broad range of institutions, including the NZ Super Fund and ACC, from community trusts and iwi, and large groups of wealthy people.

Bingham believes the private equity sector is "complementary" to the NZX, which he says is "really interested in businesses over $100m".

Not so, says the NZX.

QEX Logistics listed in February with a market capitalisation of $20m, notes a spokeswoman. Today it has grown to $61m.

QEX listed on the junior equity board known as NXT, which will soon be removed from the NZX to create a single structure and build scale on the main board.

The restructure follows a review by the NZX, the results of which will be released shortly, says the spokeswoman.

"As part of this process, we have carefully considered the minimum listing requirements to ensure NZX has an effective pathway for small to medium-size businesses to list. The minimum capitalisation for listing on the NZX will be $10m."

The regulators would say they're tidying up, but actually the regulations are killing the markets.

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CM Partners' Preston suggests funds like the NZ Superannuation Fund and KiwiSaver funds should be challenged about why they don't invest more in the New Zealand SME sector.

He says the Government should be leading structural reform. "The regulators would say they're tidying up, but actually the regulations are killing the markets.

"Under KiwiSaver, you can only have one provider. You can't have a high-tech fund with Milford, for example, and a fixed interest one with Harbour Asset Management. You can't have a mix of providers.

"There's got to be Government involvement because the capital markets and SMEs are just too important to the New Zealand economy. The Government should be supporting a huge number of really vibrant capital markets. We should be a stepping stone for New Zealand companies to get more capital and grow. But we are not doing that."

Preston also notes that in Australia, "where funds aren't hindered by prescriptive mandates", there are many boutique funds to invest in smaller emerging companies, and some individuals even run their own superannuation funds where they allocate their money to selected investments.

Preston wants to know why the NZ Super Fund (NZSF) invests many billions overseas instead of channelling more into New Zealand companies.

The fund has $34b invested overseas, out of a total fund of $40b.

Its head of New Zealand direct investment, Will Goodwin, says about $6b, or 15 per cent of the total NZSF, is invested in companies here, which include KiwiBank and Datacom.

NZSF support to New Zealand Inc. includes a commitment to invest $450m over time to expansion capital investments in small, high growth companies in New Zealand.

Goodwin says outside its core New Zealand company investments, the NZSF invests expansion capital in nimble, growth businesses through four fund managers. To date, through Pioneer Capital, it had helped fund 56 companies with expansion capital, most recently MoleMap, Tom & Luke and SmartFoods.

"These are businesses with revenue typically between $5m and $50m," says Goodwin.

"I would say ourselves and ACC are by far the biggest investors in expansion capital in
New Zealand."

Craigs Investment Partners is one of New Zealand's biggest share brokers. Its head of private wealth research, Mark Lister, says SMEs need to be well-supported because "they are the ones that end up being the big companies".

But what investors want is also important, he says.

It's a fact that the typical Kiwi with dollars to invest is retirement age or older. "People at that stage of life tend to flock to the lower risk, conservative style of asset".

"It's why a lot of companies popular with investors on our sharemarket are the mature businesses with steady cashflows and dividends. It's also a reason why such a huge amount of money is sitting in bank term deposits."

The bigger picture

Economic Development Minister David Parker says the issue of connecting capital markets with SMEs is just part of a wider problem of capital misallocation in New Zealand.

"Our limited pool of precious investment capital is misapplied in a number of ways," says Parker. "Too much of it goes into speculative investments in land-based asset classes and that's driven by tax preferences and also some of the rules - which I am not criticising - of capital ratios for some types of lending."

The Tax Working Group is addressing the tax aspect, Parker says.

The Government's R&D tax credits effectively assist capital raising because the overall cost to an investor is less if they have a tax credit, he says.

"Yes, we are looking at whether there are gaps, particularly in the expansion phase (of companies, as they grow into overseas markets."

Parker agrees there is a problem with the venture capital part of the market. The previous Labour Government set up the NZ Venture Investment Fund and this Government is considering if it needs to do more.