Small, technology-related shares have long been a mainstay of the NZ Stock Exchange (NZX). It's arguably one of the few sectors where the local exchange competes effectively with its larger competitor across the Tasman.
I've written previously about the success of Plexure Group ; over the last week it was the turn of Eroad and Pushpay Holdings to add to the stellar performance of the NZX-listed "smalltech" shares.
This started out as a column to discuss the recent results of those organisations. But then I got distracted.
Those companies (among others) have started and succeeded on the NZX. So why do many new listings choose to head off to the Australian Stock Exchange (ASX)?
Companies often cite the advantage of an ASX listing based on increased research coverage and access to a larger funding pool. Liquidity is also a factor; more market participants helps investors buy and sell company shares. More on that later.
Aroa Biosurgery is the latest NZ company to head across the Tasman to look for capital, continuing a steady trend of Kiwi companies listing on the ASX in preference to New Zealand or for established companies to pursue a dual listing.
Aroa joins 56 other New Zealand companies listed on the ASX. Of those, 40 are also listed on the NZX — including Pushpay — leaving 16 NZ companies (including Xero) that are just that bit more difficult for Kiwis to invest in.
It's a shame. New Zealand investors have proven themselves as astute as their Aussie counterparts, and just as forthcoming with cash for the right company. And the more it occurs, the more likely it is that the argument will become a self-fulfilling prophecy.
What will it take to break the cycle?
NZ v the world — the funding pool
There's no doubt that a dollop more cash is available for equities in Australia compared to New Zealand. And unfortunately, it's not all down to population.
As of the March 2020 quarter, NZ had about $200 billion of invested funds, either individually or through managed funds. For the same period, the Australian managed funds industry had just under $4 trillion in NZ dollars — twenty times the size of little ol' New Zealand.
The reality is that New Zealand is the outlier. The table, which shows a group of other countries for comparison, doesn't tell a great story: for whatever reason, our funds under management per capita are far less than other economies we often choose to benchmark ourselves against.
To be fair, there's likely to be some Kiwi cash among the Australian figure, but while that may offer some solace on our savings habits, it doesn't say much for our perceived capability as a nation to manage investment funds.
We have the traditional Kiwi dream of investing in housing to save, so surely that means we have higher non-financial asset ownership, right? Except we don't. Home ownership rates in that list are broadly similar at around 65 per cent, with the notable exception of Japan at 61 per cent.
No doubt, it was the realisation that Kiwis are not the world's best savers that set the wheels of both KiwiSaver and the NZ Super Fund in motion. It is likely that KiwiSaver has made a difference — the compound annual growth rate in managed funds after the scheme was introduced is around 8.4 per cent, compared with about 6 per cent beforehand. But given that Australia has had a similar scheme for longer (since 1992), it's unlikely we will catch up without disruptive change in the way New Zealanders choose to invest.
Perhaps services like Sharesies, InvestNow and Hatch, coupled with higher home ownership costs, represent that next wave of change in our approach to investing.
Existing fund and wealth managers might regard them as competition (as they should), but they are also more likely to increase the number of participants in the financial investment market in the long term, as the purchase of small share parcels reduces the perceived absolute risk of investing and makes it more affordable.
Most of Sharesies' customers invest relatively little right now, but as they age, their investment habit is likely to increase, growing New Zealand's overall pool of invested funds.
Leighton Roberts, co-founder and Director of Sharesies, agrees. "We're training the next generation of New Zealand investors, creating customers for the fund management industry's future".
Recent events have shown that retail investors are again finding their voice on the NZX.
Both KiwiSaver and the wave of growth in market participants over the last few months enabled by the likes of Sharesies represent a long overdue "democratisation" of investment practices. "Our legacy will not just be New Zealanders having material ownership in local companies, we want them to have material influence as well," says Roberts.
Another potential "disruptive factor" was the industry-led capital markets review sponsored by the Financial Markets Authority (FMA) and the NZX in early 2019.
The report outcomes highlighted the role of KiwiSaver in New Zealand's investment markets and the development of a "two-tier" public market that was less effective for smaller companies and struggling to attract new listings. Unsurprisingly, it recommended "[growing] the base of companies that can access the public capital market, reduce the barriers to listing where possible and increase motivation for public companies to remain listed".
Progress on this is due to be assessed in March 2021, with the NZX leading the assessment process on behalf of the industry.
The NZX arguably has the most to gain from the report's outcomes. "We've baked the recommendations of the report into our annual business plans, including developing alternative pathways for companies to list on the exchange", says NZX's Hamish Macdonald.
Nonetheless, investors are yet to see the kind of "disruption" required to change the mentality of companies so they raise capital within New Zealand rather than offshore.
Why does this matter?
New Zealand is a great place. We put life's competing factors in "balance": family, self-motivation, work, money, lifestyle and so on. My belief is that one of the greatest strengths we have as a nation is our ability to accept a person from anywhere and make them one of us. That creates other advantages, among them our faith in a truly diverse society in terms of culture and ideas.
There is always more we can do to respect the tikanga and taonga of our past. Past and present combine to create a constant influx of ideas, driven by people from all backgrounds.
A means to raise and exchange capital is one of the mechanisms by which those ideas come to fruition. Venture capital funds, private equity funds, banks and others all play their role in how Kiwis invest in new ideas — but financial markets form the true test of how they are funded, valued and commercialised.
In that context, the NZX should be brimming with new companies and high liquidity — and we should have a high rate of investment locally.
In practice, the ASX started to nibble at the icing on the cake 30 years ago and has now graduated to simply eating the whole damn cake. Ironically, this has helped Australians invest in companies and funds that reap the benefits from ideas and value generated on this side of the Tasman.
There is an implicit barrier for a New Zealander wanting to invest in an ASX-listed New Zealand company, as they need to incur currency exchange costs. Banks and currency exchange organisations charge a margin on the wholesale rate, making buying and selling shares on the ASX more expensive for a New Zealander.
That "funds under management" table is telling. New Zealand already has relatively low rates of investment, so our legacy "means of investment" (including the NZX) are already perceived as a barrier for most Kiwis, rightly or wrongly. Add in the requirement and cost to transfer currency, and the "scary factor" just went up for much of the country.
The irony is that the NZX50 has been a strong performer compared to other global indices over the last few years, a performance it is currently maintaining through the Covid-19 period. That isn't actually a reflection on financial markets, of course, but reflects well on the value of Kiwi innovators.
Back to the smalltechs — liquidity
It's almost unfair to call them "smalltechs". Pushpay Holdings' market capitalisation is now $2.4b, driven partly by the significant rise in their share price following a 2020 result that outperformed investors' expectations. Eroad is 10 peer cent of Pushpay's market capitalisation but has delivered similar revenue growth.
Pushpay is dual-listed on the NZX and ASX, while Eroad is listed only on the NZX. As corporate information flows freely across Australia and New Zealand, it is unlikely that either company is valued differently just because of which side of the Tasman it is listed on. It's worth noting that Pushpay benefited from one of the "alternative listing pathways" promoted by the NZX; an exchange listing with no new capital immediately issued.
Part of the attraction of the ASX relates to increased liquidity of shares. Many factors influence liquidity, such as major shareholders that essentially make large blocks of shares untradeable. In Pushpay's case, around 61 million of its shares were traded on the ASX over the last 12 months, compared to 160 million shares, or 72 per cent of its liquidity, traded on the New Zealand exchange. For Pushpay at least, it's unlikely the liquidity argument stands up.
NZX's Macdonald goes further. "For those companies that are dual-listed, the NZX represents an average 80 per cent of their liquidity".
Closing the gap
This is not a discussion about the NZX or existing fund managers. It's important for New Zealanders to be able to invest locally and to exchange shares when they need to — without any discriminatory barriers. Whether that is on the NZX itself or some future incarnation is moot.
The role of the industry — FMA, stock exchanges, brokers, advisers and even listed entities — is to provide effective tools to make it easy for people to invest, reduce barriers to investment, increase Kiwis' investment knowledge and enable our local investment markets to grow.
Implementing an effective accountability structure, rather than relying on a "coalition of the willing", for the recommendations of the Capital Markets report and encouraging a culture of "transformation" in investment markets would be a good start.