Dearth of floats may be sinking New Zealand

By SIMON LOUISSON

What happens when the Stock Exchange fails in its function to raise new capital?

Initial Public Offerings (IPOs) on the main board of the Stock Exchange this year have totalled zero.

More than half the year has passed and not one cent of new cash has been raised through an IPO on the exchange's main board.

"This year has been woeful for IPOs," said Don Turkington, executive director with brokerage Forsyth Barr Frater Williams.

"That's true worldwide, but very few countries have such low levels of public capital raising as New Zealand."

The Australian Stock Exchange is bemoaning the drop in IPOs in the 2000-01 year to 156 from 183, raising only $A5 billion ($6.3 billion) from $A18.8 billion in 1999-2000, according to figures produced by KPMG.

The accounting consultancy does not keep similar records for New Zealand.

There were few listings last year on the NZSE but even fewer this year.

Rubicon, Fletcher Building, Kirkcaldie and Stains, Richmond and Wellington Drive Technologies are the new names but the first two were offspring of the Fletcher Challenge break-up, whose two premier units (Paper and Energy) delisted, and the last three have stepped up from the secondary board to the main one.

Wakefield Hospital is scheduled to break the IPO duck for 2001 but new capital raised is likely to be only around $10 million.

The dearth of IPOs is "a serious problem," said Craig Brown, senior equity portfolio manager at the country's largest fund manager, AMP Henderson Global Investors.

"An equity market is there as a source of funds for businesses that need to grow and it is also there as an effective and efficient discipline to ensure you have effective allocation of the country's capital."

The lack of IPOs does not mean no capital has been raised in New Zealand. Existing companies have raised capital, most notably the ill-fated raising of $500 million by Telecom through a share placement in May that sent its share price scurrying downward.

As well, the direct equity market has been thriving. Wealthy individuals and companies such as ANZ Private Equity, AMP Private Equity and Direct Capital have been active in seeking start-up opportunities or investing in under-capitalised new companies.

But investment in these companies tends to be lumpy and lacks the flexibility or liquidity of a publicly listed vehicle.

Foreign companies scouting for opportunities have also stepped into the void.

Dr Turkington said the lack of IPOs had been a perennial problem of the New Zealand capital market.

The big change recently had come with the Coalition Government's halting the transfer of companies from the public sector to the private.

Independent analyst Brian Gaynor recently showed that former public companies comprise nearly half of the sharemarket's capitalisation. The likes of Telecom, Air NZ, Contact, Tranz Rail and Tower are valued at $20.9 billion.

Take away the value of the post-1987 privatisations and the New Zealand market would be worth just $23 billion - just over half its 1987 value, worth about an eighth in inflation-adjusted terms.

Dr Turkington said brokers were continually hunting for potential IPOs but finding healthy, growing private companies needing more capital was difficult. New Zealand simply lacked enough fast-growing companies.

"It's a problem with the economy - that the economy is not really being an incubator for unlisted companies."

In fact, the barometer NZSE-40 index had gone nowhere for nearly eight years.

Dr Turkington said the index's lack of growth undoubtedly had a cumulative effect on discouraging potential companies from coming to the market.

"If you have doubts about how your company's going to fare in what you perceive might be a difficult market, you might go a different route and you certainly would avoid listing."

Instead, such entrepreneurs as there are have turned to the direct equity market which has grown in leaps and bounds.

Dr Turkington partly blames the Stock Exchange's mutual structure, which is focused on minimising costs.

Other exchanges such as the Australian Stock Exchange, which is a listed company, have put more resources into marketing with good results in terms of encouraging companies to list.

Plans to demutualise and corporatise the NZSE should help rectify the marketing problem.

Mr Gaynor argued that there had been a shortage of equity capital which had hindered economic growth and he partly blamed the exchange.

Equity investors were devastated by the 1987 crash and they had not returned to the sharemarket because of inadequate protection offered by skimpy and untrusted regulation as well as poor company performance.

"The shortage of capital is self-perpetuating. Companies have to fund their expansion with borrowings. This increases risk, and the odds of failure, which in turn reduces the availability of equity capital," said Mr Gaynor.

And the shortage of equity capital had forced the Government to sell its assets to overseas investors and a select number of local investors.

Mr Gaynor said that while reforms had generated competition and increased consumer choice, there was a growing realisation that greater emphasis must be placed on encouraging business formation and expansion.

Both Mr Brown and Dr Turkington agreed.

Mr Brown said the lack of opportunities here meant investment funds had increasingly been looking to Australia to maximise diversification as opposed to focusing on some of the better businesses here.

He said small investors handed their money to institutions such as AMP Henderson primarily to invest in listed companies and that was where the institution would prefer to invest.

Dr Turkington said IPOs were important to attract new investors into the market and increase its size. "People get sick of the limited range of companies we have on the market."

Although there were alternatives for raising capital, he said, the stock exchange was a very useful and important source.

- NZPA