Capital Markets

Capital Markets Bridging the gap

Section D

Thursday, May 8, 2014

The mixed-ownership model has contributed to a ‘significant up-tick’ in sharemarket activity

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Christopher Adams

ne of the key architects of the Government’s state asset sale programme says New Zealand’s capital markets are sitting on a solid foundation following the sell-down, which has driven increased interest in New Zealand equities both here and overseas.

Rob Cameron, the executive chairman of Wellington investment bank Cameron Partners, who headed the Capital Markets Taskforce that recommended the sales in 2009, says developing a mixed ownership model through the listings of Mighty River Power, Meridian Energy and Genesis — as well as a block sale of already listed Air New Zealand — has resulted in investors having ‘‘much better choices’’. ‘‘The way I look at it is from the point of view of the capital markets,’’ Cameron says. ‘‘The Capital Markets Taskforce showed it [the market] didn’t serve retail investors’ needs particularly well. There were quite big gaps in the sort of products offered, particularly substantial lower-risk investments.’’ He says the asset sale programme has also been a ‘‘big heads-up for overseas investors’’.

It is ‘‘neither here nor there’’ that the Government didn’t quite reach the upper end of its revised target of raising $4.6 billion to $5 billion ($4.67 billion was raised) out of the sales, Cameron adds. ‘‘There’s 115,000 new retail investors registered in this, which is significant as a proportion of our population and there’s very little doubt that if the Government had chosen to just auction off the shares to all comers internationally it could have got higher prices but it would have had much less impact on our capital market and particularly the participation of retail punters.’’

Shares in Meridian and Genesis have risen well above the prices they

NZX’s Tim Bennett: a broad range of firms have expressed an interest in floating this year.

were listed at, while Mighty River Power shares — which listed at $2.50 — were trading at $2.33 on Monday after falling as low as $1.95 in January.

Air NZ shares have gained ground on the price they were sold at in the November block sale. Brett Shepherd, chief executive of investment banking at Deutsche Craigs, says 2013 was a ‘‘watershed year’’ for New Zealand’s capital markets. ‘‘Because there was more product

[available] we got more international institutions being interested, which created greater liquidity in the New Zealand marketplace,’’ Shepherd says. ‘‘The platform from last year — both the scale of what took place which is unprecedented and the quality of product across the board — just resulted in greater international interest across the marketplace.’’

Cameron says having companies like Genesis and Meridian on the

market has ‘‘filled a hole’’. ‘‘In terms of giving New Zealand bigger, deeper capital markets and in terms of giving investors better choices, this has been very successful,’’ he says. ‘‘The MOM model has undoubtedly contributed to a significant up-tick in trades that we’ve seen — about 30 per cent over the last year — and the environment it’s creating for IPOs [initial public offers] more generally.’’

NZX chief executive Tim Bennett is bullish about the prospects for new sharemarket listings in the year ahead.

He says about 40 companies are mulling listings and up to eight have taken the next step and appointed advisers — a good indication of how serious they are about going public.

More than $7 billion of new capital was listed in 2013 through 10 New Zealand IPOS, while an additional $5.7 billion was deployed into the market via secondary capital raisings and sell-downs by strategic investors.

Technology listings dominated the smaller end of the IPO market last year through the listings of SLI Systems, GeoOP, Wynyard Group and Snakk Media.

Bennett says firms from a broad range of sectors have expressed an interest in floating this year, including ‘‘more traditional businesses where technology is not at the forefront.

We’re particularly pleased by the diversity of companies that are thinking about listing.’’

Private training provider Intueri Education Group will raise as much as $234 million in a dual NZX/ASX float this month.

Intueri, being spun out of its Australian-listed parent Arowana International, is expected to become New Zealand’s biggest private training establishment — by domestic students — with 6000 local enrolments and a further 1000 international students each year, across 26 locations. It also

owns half of Online Courses Australia.

Meanwhile, the $300 million float of Hirepool — New Zealand’s biggest equipment rental business — will take place during the first half of the year.

Technology companies including Eroad and Triplejump have indicated they may list, while there has also been speculation that Scales Corporation, a Christchurch-based fruit and vegetable marketer, is preparing for a sharemarket float.

Bennett says the NZX’s new Growth Market, designed to provide a cheaper and lower compliance market for small and medium-sized businesses, is expected to be up-andrunning by the middle of the year.

It will have website separate from the main NZX site and investors who want to take part will have to certify they have read and accepted a risk warning before investing.

Instead of a full prospectus, companies will be required to prepare a listing document, which includes projections against key operating milestones, but will not have to forecast financial information.

The NZX will also begin offering equity derivatives on June 16.

Such products, which are common overseas but haven’t been available in New Zealand for many years, give market participants such as fund managers a tool for hedging risk.

Futures contracts will trade off the NZX20 index, which was launched in 2012.

The stock exchange is also planning to launch single-stock options, says Bennett.

Salt Funds Management managing director Paul Harrison says the unavailability of equity derivatives has been a ‘‘glaring absence’’ in the New Zealand market. ‘‘It’s an important tool that’s available to fund managers in most markets,’’ Harrison says. continued on D6

Debating our next move Rob Cameron Changes have produced significant improvements in our capital markets — a healthier environment for retail investors, markets which function more effectively as an engine of growth.

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David Parker Labour’s upgrade will address external deficit of over $10 billion by making sure we export more overseas to pay our way in the world.

The investment pillar of the upgrade requires support for capital markets.

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David Skilling Further strengthening our capital markets and national saving performance is vital to building economic resilience and sustaining our economic performance.

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Sean Keane David Parker will be in the running for the Nobel Prize if this elusive prescription proves to be effective.

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

Infinz: seizing the opportunity

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Bill English on why the capital markets will matter a lot more in the future.

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Anthony Quirk

new era has dawned for capital raising opportunities in New Zealand. On April 1 this year, new provisions of the Financial Markets Conduct Act 2013 (FMCA) came into force, bringing with them a vision to reduce the costs of small company offerings, facilitate the creation of low-cost exchanges for growth businesses and reduce the costs for companies raising capital.

Seizing these opportunities, however, is another matter and they will go begging if the private sector does not grasp them.

It’s going to take courage and innovation from the market — and a change in mindset.

It will also require the effort of the entire capital markets community.

Business owners, management, directors, trustees, legal and financial advisors — all will need to look with fresh eyes at how Kiwi businesses raise capital in the future.

The importance of New Zealand’s capital markets can not be underestimated; up to $200 billion of fresh capital needs to be found in the next decade if we’re to meet performance targets set by Government for our export sector.

So what new opportunities are now available?

New opportunities Crowdfunding has been a phenomenon in recent years, and both crowdfunding and peer-to-peer platforms can now apply to the Financial Markets Authority (FMA) to become ‘‘licensed intermediaries’’.

This status allows companies to use such platforms to issue shares or raise money from the public without having to go to the expense of supplying a full product disclosure statement (PDS).

There is a $2 million annual cap on how much equity a company may raise, or a borrower may borrow.

A simplified process is also available for small personalised offers. To qualify, the offer must seek to raise no more than $2 million in any 12-month period and must be limited to 20 investors — each of whom is connected personally or professionally to the issuer, either through previous association or through an expression of interest (angel networks).

The flexibility to establish lowercost platforms for raising equity is another innovation the FMCA facilitates.

For those companies looking to raise more substantial amounts of equity, NZX is consulting around a New Market, which it will launch later this year, targeting businesses with market capitalisations between $10 million and $100 million. To simplify the initial public offer (IPO) process and reduce listing costs, it’s proposed businesses will not be required to provide prospective (forecast) financial information or full continuous disclosure.

The New Market will also operate in a streamlined regulatory environment, with simpler, template-based rules and procedures.

For companies looking to raise debt or equity from the public, the FMCA provides flexibility for muchreduced disclosure requirements where the issuer already has listed debt or equity securities in the marketplace.

For companies looking to list on the sharemarket for the first time (an IPO) or to offer a new class of securities to the public, the issue of a PDS

Inside

The crowd-funding phenomenon is a new addition to the small business owner’s toolbox.

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Commerce Minister Craig Foss (top) at the Infinz Awards. Below: Brooke Bone from Milford Asset Management, MC Philip King, and Lance Jenkins from Waterman Capital in an Infinz Conference session on capital readiness,

Bill Bennett talks to Kiwi tech stars about riding out the global financial epidemic.

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Infinz industry awards A record turnout of more than 800 guests is expected at Auckland’s Langham Hotel this evening for the annual Infinz Industry Awards.

At the black tie dinner, the capital markets industry will recognise the success and professional standards of leading participants.

Infinz presents awards in corporate treasury, banking, funds management, sharebroking, equity analysis, investor communications, best debt issue and debt deal and equity deal and for the best mergers and acquisitions transaction. A Leadership Award is also presented.

APN NZ Media is media partner for the Infinz Industry Awards. The NZ Herald’s The Business is sponsor of the Institutional Banking Innovation Award.

INFINZ CONFERENCE 2014: SEIZING THE OPPORTUNITY Following the regulatory reforms, including the Financial Markets Conduct Act, the ball is firmly in the court of the private sector to take full advantage of the fresh and innovative opportunities to raise capital. Be briefed by FMA/MBIE on these new opportunities. Hear from the NZX, which is launching the New Market for growth businesses. 2013 has been a record year for listings on the stockmarket — what are the lessons and learnings from recent issuers?

How can we enhance the effectiveness of corporate governance in NZ? What are the changing expectations of directors of their CFOs and treasurers? Hear case studies from CFOs and treasurers on capital management, implementation of treasury systems and best practice financial risk management.

The Infinz Conference, to be held in Auckland on October 30 is for business owners, directors, CEOs, CFOs and Treasurers, fund managers, corporate finance advisors, sharebrokers and corporate lawyers. www.infinz.com. will in future be required. The intention is this will be both shorter and more relevant than existing prospectuses. Much of the financial detail will be required to be placed on an online register, which can be accessed by potential investors.

But reducing the costs of producing mammoth prospectuses — running up to 250 pages long — is only one objective of the reforms. Another — and equally important — objective is to produce offering documents that are more accessible to the investing

public, with the law requiring they be ‘‘clear, concise and effective’’.

The recent Investment Statement produced for the IPO of Genesis Energy was something of an informal dummy run; it contained key information about the company while running to just a quarter of the length of the Mighty River Power combined offer document.

There will be further potential for step-change improvements when the new regime comes into full force on December 1.

New thinking required So the ball is now firmly in the private sector’s court. The challenge for the entire capital markets community will be to embrace these new provisions wrought by the FMCA and seize the opportunities they can create. Our wider New Zealand economy depends on it — and along with it the success of many great New Zealand companies.

Infinz is committed to playing its part, and ‘‘Seizing the Opportunity’’ will be the theme of the organisation’s 2014 conference, scheduled for October 30 in Auckland. ● Anthony Quirk, is CEO of Milford Asset Management and Chair of the Institute of Finance Professionals New Zealand (INFINZ).

About INFINZ Infinz is the leading industry body for capital markets professionals in New Zealand. It has a membership of over 700 individuals, drawn from across the capital markets and includes treasury professionals, investment analysts, fund managers, bankers, lawyers and students.

Alexander Speirs looks at what’s happening with KiwiSaver money and Peter Neilson asks whether a compulsory fund could be a gamechanger.

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ANZ’s Graham Turley talks agribusiness for investors and we look at Fonterra’s China moves — D16

CAPITAL MARKETS 2014 Executive Editor: Fran O’Sullivan Writers: Liam Dann (Herald Business editor), Christopher Adams, Bill Bennett, Brierley Penn, Alexander Speirs.

Sub-editor/graphics: Isobel Marriner Advertising: Sandra Evans Advertising co-ordinator: Nancy Dudley nzherald.co.nz AGRIBUSINESS 2014 is the next in the Herald’s business reports series.

If you wish to submit material to this report please contact Fran O’Sullivan: fran.o’sullivan@nzherald.co.nz

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

The push to a sustainable future Brierley’s replacement could have been Graeme Hart if he hadn’t outgrown NZ almost as fast as the pop star Lorde, writes Herald Business Editor Liam Dann

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ew Zealand’s financial sector is in a sweet spot — relatively speaking. Nobody is partying like it’s 1986. Or 2006 for that matter.

But if the growth — Xero excepted — hasn’t been as dramatic as it might have been in booms past, then that is probably a good thing. It suggests a greater chance of sustaining a bull market.

The New Zealand market certainly feels more secure. There is the appearance of better regulation. The new regime has not yet been fully tested. There may be complicated new investment products being constructed as we speak. But the appearance of better regulation is a good start. There is an element of selffulfilling prophecy about it.

The Financial Markets Authority has been prepared to take a proactive role in commenting on products it has concerns about. More generally the investment sector still has the lessons from the global financial crisis and the local finance company meltdown top of mind. Hopefully investors do too.

There is still risk out there, but hopefully it is better understood and more openly recognised.

There is risk, for example, that the growing tech sector and rapid rise of tech stocks on the NZX might create a localised bubble, as investors chase

the next Xero. Despite not yet making profits, Xero is a mature tech company with cash in the bank. It has a big global reputation and a wide base of sophisticated shareholders. These things put it in good shape to handle the kind of wild swings in value that might have other companies hitting the panic button.

But not everything in the local tech sector has that solid platform. Even the best-run companies in that sector are high risk until they have a proven product.

What is appropriate for venture capital is not always appropriate for the public market and timing for companies in this space will be a key issue for market watchers as the local tech sector expands.

Investors should go in to the tech sector with their eyes wide open. The key, as with all companies seeking public money, will be the quality of information and disclosure that is available to investors.

It reassuring to think we have an FMA that is watching closely on this score. It certainly wasn’t afraid to give the Government a rap on the knuckles over its Mighty River Power documents.

Meanwhile, despite the rough start, the newly listed power companies look stronger and stronger. They may take another hit if the Government

changes. But that should become progressively clearer one way or another. As the market recovers from the initial shock of the Labour/Green power policy we can only hope that not too many first-time investors were spooked into selling out.

These were always long term stocks for those seeking good dividends. The NZX is well-served in this space now.

If there is a weak spot on the NZX it is in the gap between the slow and steady dividend stocks and the higher-risk growth stocks.

If we are honest there are some good companies on the market that

are underperforming for investors.

As outgoing GPG chairman Rob Campbell pointed out earlier this week, there is room in this market for a new generation of shareholder activists.

Sometimes corporate activity is the only way they are going to start to return value.

We’re certainly seeing things start to stir on that front. The risk is that our market becomes vulnerable to opportunist bids from large international players.

Campbell was effectively saying we need another Ron Brierley — someone on the local scene who can

drive the kind of radical change corporates sometimes need to get back on track.

Brierley’s replacement could have been Graeme Hart if he hadn’t outgrown New Zealand almost as fast as the pop star Lorde.

Hart hasn’t been too interested in the listed market for some years.

But he remains a player and, as his sale of Carter Holt paper assets suggests, he could be getting more active.

As he divests he will also be looking for opportunities.

Perhaps he still has one big New Zealand play left in him.

Meanwhile we’ll wait and watch to see if the broader economic recovery can drive better results for some of the consumer-focused stocks.

There has been no shortage of talk about the economic recovery. Local market strength has been a good indicator of the confidence that has returned.

But, ultimately, the sustainability of the rising market will depend on that confidence flowing through to the real world economy.

We need to see wages rise and the real wealth of ordinary New Zealanders improve. Hopefully this will unfold over the coming year or so as the recovery takes hold.

We are still very much at the start of what will hopefully be a long and positive economic cycle.

Now is not the time to sit back and relax because things are looking good.

Now is the time to keep a close eye on risk, a time to assess the effectiveness of new regulation, a time to push on towards a longer and more sustainable economic cycle than this country has ever seen before.

Funding New Zealand through local and global connections.

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As a market leader in New Zealand debt capital markets, with connections into 33 countries globally, ANZ can provide access to more capital for more New Zealand businesses than any other New Zealand bank.

To find out how we can help you develop your capital opportunities, call Dean Spicer on 04 381 9884.

anz.co.nz In New Zealand, ANZ is ANZ Bank New Zealand Limited. Elsewhere, ANZ Group is Australia and New Zealand Banking Group Limited and its affiliates.

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

A big shift in the landscape The government mixedownership model processes and the rebounding economy can take some significant credit for the surge in interest in the listed capital markets.

More listings and new laws have the capital markets abuzz, say Michael Pollard and Andrew Matthews

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here has been a lot happening in New Zealand’s capital markets in recent months. We have seen a marked increase in companies coming to market and the introduction of new laws to improve capital markets’ disclosure and regulation.

Last year was an incredibly strong one in the Initial Public Offering (IPO) market — the strongest since the mid2000s.

The list includes Mighty River Power, Z Energy, Meridian Energy, Synlait, Airwork, SLI Systems and Wynyard Group. 2014 has already seen the Genesis Energy and Intueri offerings and there is a strong pipeline of floats making their way to market.

The IPOs from here on in will be a different mix, including exits from private equity firms, and offerings from tech companies whose prospects have been buoyed by the success of Xero and GeoOp. The government mixed-ownership model processes and the rebounding economy can take some significant credit for the surge in interest in the listed capital markets. Low interest rates (domestically and globally) are also relevant as investors look for better returns (including the yield from dividend streams). Rising interest rates are not likely to materially dampen enthusiasm at this point in the cycle.

The strong capital markets activity has coincided with a wave of new law

focused on improved disclosure and governance of both debt products and managed funds, This represents a massive shift in the legal landscape. It has largely flowed out of the 2009 Capital Markets Development Task Force Report and sees the replacement of a huge swathe of securities laws dating back to 1978. The new Financial Markets Conduct Act alone is over 450 pages.

Most of the new law comes into force on December 1 this year. The current disclosure regime, introduced in 1997, was designed to provide investors succinct and relevant offering documentation but has instead resulted in documents that are large, complex and daunting for retail investors, (as the Financial Markets Authority (FMA) said in its October 2013 report on the implementation of clear, concise and effective disclosure). Two hundred plus pages of disclosure from a combined investment and prospectus has become the market norm — largely because of concerns that liability might arise out of a failure to disclose something that could, even if unlikely, be a risk of investment.

The good news is that, under the FMA’s stewardship, the market’s approach to disclosure seems to be moving in the right direction already. Both Genesis and Intueri have moved away from the combined document approach and have obtained exemptions allowing the exclusion of some irrele-

Caption

Initial Public Offerings 2013 Mighty River Power Z Energy Meridian Energy Synlait Airwork SLI Systems Wynyard Group.

2014 Genesis Energy Intueri vant prescribed information and the presentation of disclosure in a more logical manner than prescribed by law.

Whether the proposed law changes will increase the public’s general investor literacy remains to be seen, but they will make the information more accessible. Accessibility of information to investors is crucial. A recent

investor survey conducted on behalf of the Financial Markets Authority and NZX showed ‘‘people who decided not to invest in an IPO showed a tendency to find the information in offer documents too much to digest’’ and that was indicative that ‘‘IPO documents — prepared under previous legislation — may have been an obstacle in decision-making for some investors’’.

For companies coming to market, the changes to disclosure should generally be positive. Documents should be shorter and more digestible and if the survey for the FMA and NZX is anything to go by, better disclosure is likely to result in an increased number of investors. The companies will also benefit from the change to the criminal liability regime, which means a director is only criminally liable for defective disclosure where they knew the disclosure was defective (or they were reckless).

This contrasts with the current ‘‘strict liability’’ position. Directors (and potential directors) can be forgiven for

being slightly gun-shy against that background.

Another high note has been the 1 April introduction of law changes flowing from the government’s business growth agenda which are designed to facilitate access to growth capital. These changes, and those which are effective on 1 December, will make the law much easier to interpret and less restrictive. Previously, there were too few opportunities to raise capital without a prospectus and investment statement.

Key business growth agenda changes include new exclusions for small offers, employee offers and offers made over a ‘‘crowd funding’’ or ‘‘peer-to-peer lending’’ platform. The most interesting has been borrowed from Australia and allows a company to raise $2 million per year from up to 20 investors.

With more offerings, together with more accessible and better quality information, we expect to see the continued strengthening of our capital markets. ● Michael Pollard is co-head of the corporate advisory group and leads the private capital group at Simpson Grierson; Andrew Matthews is a senior associate at Simpson Grierson.

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

Views from the front line Frank Aldridge Managing Director Craigs Investment Partners

Scott St John Managing Director First NZ Capital

David Green Managing Director — Institutional, ANZ New Zealand

Frank Aldridge is upbeat about the quality of the companies that are now coming to the NZX. ‘‘A couple of years ago people didn’t see listing as an option whether it was a multinational exiting New Zealand or a family-owned company. ‘‘They probably didn’t even see the NZ market as an option.’’

Back then a $200 million-$300 million listing was seen as large. But Aldridge says that’s changed and a $300 million-$400 million listing in New Zealand is ‘‘more than achievable’’. ‘‘We are still in the early days and it is great to have some of these smaller companies coming through but do need mid-size companies. The pendulum is starting to swing but there’s a way to go.’’ ‘‘We do have a vibrant capital markets at the moment which is open to good quality listings and three or four years ago that wasn’t the case.’’

He believes the NZX and capital markets industry need to focus on mid-sized companies and ensure they don’t get sold offshore. ‘‘The industry needs to keep pushing to bring companies to market and increase its width and depth. He reckons it needs to broaden away from the focus on energy stocks to keep the money here otherwise more of it will flow further afield to Australia and further offshore.

That is a less difficult task in an environment where market sentiment is positive and there is a switch from investors predominantly focusing on pure income or yield, to focus on growth. But Aldridge says there’s still a lot of investor cash sitting on the sidelines in bank deposits and on call with banks when there could be quite high positive momentum. ‘‘They’re starting to be more conscious of where they put their money and how it is returned.’’

Scott St John has his thinking hat on about how the Government could recapitalise another state-owned enterprise — Landcorp — to create an agricultural vehicle that could invest not just in New Zealand but also offshore.

It’s a bit like MOM Mark two. But instead of the Government issuing shares to raise capital to fund new social infrastructure, like schools or hospitals, the funds raised would give Landcorp the wherewithal to invest in agricultural land or other assets. The Government would own 51 per cent. But the investment should be suited for large pension funds, which would be long-term investors.

St John says the Government could continue to own it — but if it moved to the front foot the asset could be grown. ‘‘Would you want to own 100 per cent of $10 or 20 per cent of $500?’’

The investment banker is disappointed the electricity policy debate reduced the number of New Zealanders who would otherwise have been involved in the MOM privitisations. ‘‘I think that is a great shame. It’s just been a waste and it didn’t need to be.’’

But he is excited about the financial markets outlook (‘‘I’m a halffull guy’’) and observes there is now a renewed regional focus which ‘‘will deliver a more tailored suite of clients in our part of the world — I see that as a good thing. Companies that are doing smart things will attract the attention of capital providers and investors.’’

He says there is now much more research coverage of listed stocks in New Zealand, which is a plus.

St John is actively engaged in Australia, focusing on companies outside the ASX 100 — where the companies look a bit like NZ market. ‘‘From our perspective we’re broadening our footprint to create a win-win.’’

David Green says it’s easy to tell a positive story to offshore investors who well understand the New Zealand story. ‘‘They get the agriculture story, the demand for food and New Zealand’s unique position to deliver on it. How well it underpins the economy.

And the strong initiatives around infrastructure and capital markets They get the broader story and that gives them comfort around the industry they are looking to invest in.’’

Green says though offshore investors continue to like New Zealand, the announcement of the recent $1 billion sale of Carter Holt Harvey pulp, paper and packaging business to a joint venture between Oji Holdings and Innovation Network Corporation of Japan illustrates that investment is now coming from a broader region, not just Australia and China. New Zealand’s relative positioning to Australia has also strengthened. ‘‘We used to be dwarfed by Australia around their hard commodities story but as New Zealand remained strong people looked at why that was. It’s food and how New Zealand built its position on FTAs and access. ‘‘The strong relationships where the Government has supported business to engage internationally stands out. New Zealand’s in a pretty good space. I ran the ANZ global relationship banking business for the last five months. The tone is positive globally but come back to New Zealand I think we’re in a really good space.’’

The debt capital markets remain pretty strong helped by the continuing strong demand for Kauri Issuance. ‘‘It’s not just a New Zealand dollar story but it’s a New Zealand issuer story that we are benefiting from.’’ It’s back to business for the bank’s biggest corporate issuers. After the GFC, ANZ ran major roadshows offshore. But confidence in the corporates has now strengthened as they access Asian liquidity pools.

NZ story proves attractive The mixed-ownership model has improved the understanding of investment opportunities in NZ

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Alexander Speirs

ew Zealand might be a relatively small cog in the global financial system but investors are attracted to the stability and growth of the economy and the reinvigorated NZ Story. ‘‘I definitely think people want that GDP exposure in addition to exposure to New Zealand’s soft commodities,’’ says Christopher Simcock, executive director at UBS NZ. Mark Pearce, UBS NZ director of investment banking, agrees saying ‘‘business confidence is at a 30-year high, economic growth is materially outperforming the rest of the OECD, so there’s a really positive macro story’’.

Spurred by strong liquidity and a growing demand for high-quality domestic assets, the past eighteen months has seen a variety of firms go public, from fresh tech startups like Wynyard Group and SLI Systems through to long-time stalwarts of New Zealand business like Z Energy and Meridian Energy. ‘‘They all required the presence of meaningful international investment.

The 15 per cent restriction of the mixed ownership model (MOM) obviously meant that was tempered for the government assets, but it’s been fundamental to getting these offers off the ground,’’ says Simcock.

New pools of equity have emerged, with local funds under management in particular increasing in scale — bolstered by the significant wall of cash building in Kiwisaver. Yieldfocused Asian funds and mid-cap Australian funds have also become more prominent within the market. ‘‘We’re set up well now. Like you see with Hirepool, you’re off to Asia and you’re confident you’ll get your investment. The mixed-ownership model has really, significantly improved the understanding of investment opportunities within New Zealand,’’ says Simcock. ‘‘Investors

are up to speed and many now have a portfolio here whether it’s in the MOM assets or one of the recent high profile IPO’s. It makes it much easier to attain incremental investment, because they understand what is happening in the economy. ‘‘That’s been a really positive spinoff, not one that was necessarily explicitly intended, but certainly in terms of creating new pools of capital and providing an ongoing source of liquidity and support to the capital markets has been very positive,’’ says Simcock.

Maintaining a positive business and economic environment will be essential if New Zealand is to continue to be able to leverage the gains made with international investors.

GDP growth and the terms of trade have improved significantly in recent years, but the economy remains exposed to exchange rate risk. ‘‘I think the New Zealand dollar is going to be a constant challenge. That’s been muted a bit by the strength of the commodities but with a mild inflationary environment, we are in a tightening situation,’’ says Pearce. ‘‘Our interest rates are higher than nearly every other OECD country in the world and we’ve got a higher exchange rate. That’s going to continue to create challenges. We need to make sure that we have a diversified economy and the exchange rate is a headwind to that.’’

Making sure that New Zealand continues to bring quality businesses to market and widening the range of opportunities for investment and exposure therefore remains imperative.

So far, so good though according to the investment bankers. ‘‘I don’t think we’ve had a genuine dud yet,’’ says Simcock, who sees the trend of problem free issuances continuing ‘‘as long as the technology companies are communicating what they are and what they’re not. ‘‘We spend a lot more time in terms of investor education.

Market forces

Christopher Simcock

Mark Pearce

Business confidence is at a 30-year high, economic growth is materially outperforming the rest of the OECD. Mark Pearce

‘‘Even before the formal IPO process happens, with a number of our clients we’re going through a process of asset seasoning and introducing the company and the management team to key institutional investors 12 months out or longer before any

potential liquidity event. By the time these assets are coming to market they’re well understood and they are known to investors. ‘‘That de-risks the investment both from our side and from the institutional side.’’

NZ equity capital markets are receiving unprecedented levels of attention. ● Investors are attracted to a stable and growing economy underpinned by attractive fundamentals — access to investment in food, agribusiness and consumables — ever-improving relations in Asia ● New pools of equity have emerged — increased scale of local fund managers — mid-cap Australian funds — yield-focused Asian funds offshore institutional property investors ● Regional investors are looking at the market due to an increased number of investment opportunities ● Lack of ASX diversification and favourable NZX comparison (lowbeta, high-dividend yield) ● Predictable and stable probusiness government with a transparent and high-integrity operating environment — perception of a stable government leading into a September 2014 election.

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

Game on in Aussie stadium NZ companies have made the jump to great success in Australia

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Alexander Speirs

ew Zealand businesses have adopted the All Black spirit and are following in the footsteps of vanguard Kiwi companies to put more of their investment in Australia. ‘‘What’s giving me a lot of comfort right now around our corporate position and strength is the now deep list of New Zealand companies who are looking at Australia for acquisitions,’’ said Guy Williams, Head of Investment Banking at Forsyth Barr. ‘‘There are a number of businesses that are a little under the radar screen that are doing great guns here in New Zealand and have the ambition and appetite to expand and are doing very well. We’re seeing bright, strong, credible New Zealand companies which have a message which is working in Australia and further afield.’’

Substantial growth by New Zealand companies, which have successfully been channelling low interest rates and a well-performing domestic economy into business success, is broadening growth horizons. ‘‘We’re in a period that is in some ways uncharted territory for the New Zealand market. There’s strong demand and interest in the market and a lot of good opportunities being brought to the market, with some real enthusiasm for those. It’s been a long time coming and it’s nice to see it finally arrive,’’ said Williams. ‘‘We’ve got a very strong business environment here in New Zealand.

There’s a strong economy and it’s creating strong New Zealand businesses that can either confine themselves domestically and become a yield play, or decide to increase risk and expand internationally. ‘‘The quality, strength and aspirations of the businesses we are seeing are extremely exciting. Particularly in the technology sector, the likes of Wynyard and SLI, and no doubt another half dozen who’ll come to the market this year, are proving themselves to be not only credible but incredibly successful on the global stage’’.

Not unlike young New Zealanders, developing businesses tend to set their sights on Australia as a first port of call before embarking on a more adventurous OE. A decade ago, however, successful expansion into the Australian market was a rarity. ‘‘There’s a confidence now, and a number of companies have made that jump to great success

It used to always be the case that Australia was more expensive.

But today you can purchase a business in Australia cheaper than here on a multiples basis.

Guy Williams

New Zealand’s Bledisloe Team ● Abano Healthcare — Replicating their New Zealand corporate dental business, Lumino in the Australian market. ● Delegat’s — Marketing Oyster Bay Sauvignon Blanc, now the best selling white wine label by value in the Australian market. ● Kathmandu — Australia has become the largest market for the New Zealand clothing retailer, spurring substantial growth and confidence — evidenced by 56.1 per cent year-on-year stock growth over the previous 12 months. ● Michael Hill — Expanded from New Zealand to become a leading and topperforming player in the Australian retail jewellery market. ● TrustPower — Successfully developed two wind farms in South Australia, including the Snowtown project now generating enough power for 230,000 homes each year. ● Ryman — Introducing its successful integrated retirement village business model into the Australia market, starting with Victoria. ● Vital Healthcare — The only healthcare property fund listed on the NZSX, now with over $450 million invested in the Australian market.

in Australia,’’ explains Williams.

The value of the New Zealand dollar has been a driving factor behind Australia becoming such an attractive target. Only three years ago the NZD was valued at $0.72 AUD, the lowest it has been in the past decade.

Since then however, the dollar has been on a rapid positive trajectory breaking $0.94 earlier this year. ‘‘Australia is a cheaper place now to buy a business because our exchange rate is so strong. Our valuations here are higher too, it used to always be the case that Australia was more expensive than New Zealand. But today you can purchase a business in Australia cheaper than here on a multiples basis,’’ said Williams.

Forsyth Barr took the lead when NZX listed EBOS Group made their $1.1 billion acquisition of Symbion, Australia’s largest pharmaceutical wholesaler and distributor by revenue. One of the largest private sector transactions in recent years, the investment was a significant play for EBOS as they look to expand their presence in Australasia. ‘‘The difference we’re seeing is that New Zealand companies aren’t just prepared to take the leap and expand overseas, they’re succeeding when they do it. Fletcher Building have had a harder time than most in Australia, but if you scratch beneath the surface, most of the other businesses that have moved into the market there have done well.’’

2013 was a marquee year for Forsyth Barr, as they delivered on some of the largest and most significant financial transactions of the year.

Working for the government, the firm led the retail offer for the IPO of Mighty River Power and Meridian energy.

They also served as the joint lead manager for two of the major tech sector floats of the year — raising $27 million in the SLI Systems IPO and $65 million for Wynyard Group.

Mixed-ownership model fills gap in market continued from D1

Another major development has been the Financial Markets Conduct Act, which came into force last month and will bring in changes such as simplified disclosure statements and reduced compliance requirements around capital raisings, including equity crowd-funding.

The act was partly based on the recommendations of the Capital Markets Taskforce and Cameron says he’s pleased with the outcome. ‘‘The devil’s always in the detail and there’s a bit more to go,’’ he says. ‘‘It [the new legislation] is framed much better and is much more coherent and cohesive in the way it applies and I think it should give much more certainty and predictability to capital market participants.’’

Many technology stocks have had a bumpy ride over the past couple of months and Deutsche Craigs’ Shepherd says he expects investors to be more ‘‘discerning’’ about tech investments following the recent volatility.

Stocks including New Zealand online accounting systems developer

Xero and Dunedin-based cancer diagnosis provider Pacific Edge have been knocked about as investors across the globe re-evaluate growthoriented equities whose valuations are often based on future profit prospects rather than current earnings.

Shares in Xero, for example, opened at $31.95 this week — almost 30 per cent below the all-time high of $44.98 they reached in March.

Grant Williamson, of sharebrokers Hamilton Hindin Greene, says he expects volatility around US tech stocks to continue, which will in turn flow on to NZX-listed technology shares. ‘‘I wouldn’t call it a bubble, but I think there was a little bit too much investor hype in that sector,’’ Williamson says. ‘‘With any sector that performs extremely well, when profit taking comes it comes in pretty big waves.’’

Harbour Asset Management managing director Andrew Bascand says tech sector volatility is elevated but ‘‘not extraordinary‘‘. ‘‘For instance the US Internet Index has volatility over the last month of

around 35 per cent, compared to the peak [over the last three years] of 58 per cent — the US biotech index is similar,’’ says Bascand. ‘‘Overall US equity volatility is actually lower than the average of the last 3 years. ‘‘It is just that commentators notice downside volatility more than upside risk.’’

Electricity stocks such as Meridian and Mighty River Power could be affected by the political polls as the September 20 election approaches.

Labour and the Green Party have said they will introduce tough new regulation on the sector if they take power.

The opposition parties want to create a single, state-owned power buyer and a restructured pricing model to eliminate what they say are excessive power company profits and pass savings on to consumers through cheaper electricity prices. ‘‘I think the market’s base case is a National-led government so any likelihood of a Labour-Greens government will likely see weakness in these share prices as the market is still concerned that they will attempt to

bring in NZ Power and reduce the profitability of the industry,’’ says Harrison, of Salt Funds Management.

He says the market is focused on earnings growth this year. ‘‘The market is priced on high PE [price earnings] multiples reflecting low interest rates but also expectations of earnings growing as the economic pick-up translates into revenue and profit growth.’’

Bascand says that though the New Zealand economy is seeing strong growth, company earnings have only bounced back ‘‘modestly‘‘from their lows. ‘‘The market is anticipating a lot more.’’

Bascand says this country’s equity market is on a ‘‘heady valuation’’ relative to history with a current price earnings multiple of 17.7 times next year’s expected earnings. ‘‘That is about 25 per cent above the average of the last eight years and 21 per cent higher than the current Australia PE multiple,’’ he says. ‘‘On a longer term basis, however, we have seen higher valuations than seen today, so there is still headroom for the market to move higher.’’

Lending on the increase again Bankers shelved creative lending after the Global Financial Crisis putting a renewed reliance on corporates’ traditional cashflows.

That’s according to Rod Smith, Westpac’s head of debt capital markets and Mark Steed, the bank’s head of agribusiness and property finance.

The pair say corporate lending is picking up after a relatively subdued couple of years. ‘‘They’re taking what you might call safe bets rather than more aggressive risks and are much more sure of what they are going into,’’ says Steed. ‘‘The banks have plenty of powder in the gun, but everyone’s just playing a waiting game,’’ adds Smith. ‘‘We haven’t seen for a while what we used to term the hunting licences — going out and giving people $1 billion and saying ‘Go buy something’.’’

Westpac figures show domestic debt issuance was relatively subdued in 2013. But a rush of issuers came to the domestic market in the last three months to take advantage of low credit spreads and strong demands for investors. Among the companies that have recently come to market: Transpower, Wellington International Airport, HSBC, Goodman Property Trust, Toyota Finance, Christchurch International Airport and Westpac New Zealand.

Total issuance on New Zealand’s bond markets in 2013 was $11.015 billion ($1.089 billion — corporate; $3.68 billion — domestic financial institutions; $$2.071 billion — local government; $4.175 Kauri) . In the year to date (2104) already there is $3.536 billion total issuance — marginally below the $3.72 billion recorded for the same period in 2013.

Smith and Steed say the corporate players tend to be taking ‘‘safe bets.’’

They are investing in sectors they know about — such as health, education and the primary sector. But activity is stepping up.

Steed says on the property side there is a vastly different landscape dominated by Christchurch and Auckland.

Among the interesting developments: ● Iwi — particularly Tainui and Ngai Tahu — are combining forces to coinvest using the proceeds of their Treaty of Waitangi settlements, and have bolstered up their in-house commercial capabilities. ● The NZ Super Fund under Adrian Orr’s leadership is creating an NZ Direct Fund to invest in long-term assets. ● Irrigation projects on the Canterbury Plains where farmers will be equity participants but the structure also includes infrastruture and funding plays. ● Private participation in Housing NZ’s funding; expected to get more legs after the election.

Another trend is the growing tendency by some offshore investors — including some Asian players — to invest in New Zealand to shore up distribution lines in the agri-sector rather than buying assets outright and having to go through the tradition process of gaining Overseas Investment Office approval.

This can take the form of minority holdings.

Steed emphasises it’s not just an Asian story — other overseas buyers are coming from the US and Europe.

The bank is planning to take more roadshows into Asia where industry specialists, be they agricultural or infrastructure bankers, will build investor relationships.

Face time is important.

D7

nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

Looking for the advantage B

Fran O’Sullivan

ill English stresses the capital market will matter a lot more in the future because New Zealand has massive export opportunities to fund. ‘‘Our challenge is not finding markets into which we can sell our products or more products to sell to them,’’ says English. ‘‘The biggest challenge is assembling the capital and cultural know-how on a bigger scale than we’re used to, to take advantage of these bigger scale opportunities.’’

New Zealand companies are now making decent headway in Australia and lining up to exploit the opportunities that exist to invest across the Tasman while the exchange rate conditions are favourable. Others are scouting Southeast Asia for opportunities.

But English worries that NZ’s outward direct investment (ODI) is still relatively low compared to most other developed countries. ‘‘If we really want to develop our valueadded offshore, then part of the recipe is more investments in those markets,’’ he says. ‘‘We don’t really know why our investment into Australia has been pretty much flat through the last 10 years even though they’ve had a significant economic boom. ‘‘We do know that it’s difficult to invest in other fast-growing markets like China, because you really need to know what you’re doing. ‘‘So that’s a big challenge for us.’’

The Finance Minister has directed officials to look into why New Zealand’s level of ODI is so unspectacular. The upshot is it simply confirms officials don’t have any answers. So, they’re now going out

Those markets with higher growth rates but more asset price volatility are markets in which we need to invest more. and talking to businesses about their experiences. ‘‘If you look at the numbers you can see there is a story, but no one knows what the story is,’’ says English. ‘‘So, actually, government has got to equip itself much better to understand what drives business investment decisions offshore. Then we’ve got to workout whether we can add any value to that.’’

At a practical level, English applauds the work New Zealand Trade and Enterprise has under way

to refocus and reorganise NZ’s footprint on the ground. ‘‘That’s positive, and clearly there’s a lot more to do.

Treasury is doing more theoretical stuff.’’

It might seem a rather anodyne concern for the Finance Minister — or something better left to colleagues Steven Joyce who has responsibility for the Ministry of Business Innovation and Employment or Tim Groser who has NZTE. But English says it’s an important driver when it comes to closing the current account deficit by offsetting borrowings with the returns from more equity investment offshore. ‘‘You expect our firms to be behaving in the same way as foreign firms do in New Zealand, and that is that they underpin their trade with sound investment,’’ he adds. ‘‘Our long-term commitment in the Asia-Pacific region will be demonstrated by our willingness and ability to invest in

those markets. It’s one element of competitiveness — productivity and all that competitiveness at home matters — but this is an element that looks a bit undercooked.’’

English indicates the National-led Government is ‘‘pretty pleased‘‘with progress in the local capital markets since it took office in late 2008 at the height of the Global Financial Crisis.

He applauds the work of the Capital Markets taskforce and acknowledges the foresight of previous Labour Commerce Minister Lianne Dalziel in getting the reform process under way. ‘‘So the size of their public capital market relative to GDP is growing pretty significantly,’’ he acknowledges. ‘‘We’re going through the phase now where all the new regulation is only just coming in. That’s through the result of a seven or eight year process. ‘‘We’ve got to give it time to reshape the perceptions and expectations in the market and that’s happening just at a time when there’s a feedback of confidence around on the economy — so it’s a pretty positive outlook.’’

What English wants to make clear is that the government ‘‘can’t regulate away risk’’. ‘‘There’s still plenty to do to make sure that as the new regime beds in we ensure we’ve got it right,’’ he says. ‘‘You can minimise a systemic risk, and we’ve just got to make sure we’ve got the balance right between some certainty and predictability for investors on the one hand, but making sure it’s investors who are taking the risks, not government agencies trying to get rid of it.

The Finance Minister is keeping a weather eye on international conditions.

He points to the uncertainty around the Chinese adjustment and uncertainty in Australia (‘‘their economic numbers are reasonably good, but confidence is quite patchy’’). ‘‘The other feature of the international adjustment is that we’ve had a sort of artificial stability and low growth levels, where everyone relied on central banks to keep the vehicle moving and keep growth above zero. ‘‘We’re now heading into a period where growth is going to depend less on central banks, and more on government policy particularly microeconomic policy. ‘‘That brings more political uncertainty, and there’ll be a bit more volatility, because all the asset pricing has been distorted by the flood of cheap cash that’s coming to the system. As that’s wound back, asset prices will change. ‘‘We’re in for a period, I think, of higher growth rates, but more volatility in markets. We’ve got to be aware that where it matters directly to New Zealand is around our outward investment. ‘‘Those markets with higher growth rates but more asset price volatility, are markets in which we need to invest more.

Questioned whether he believes the NZ economy is in a more healthy position to ride out another major international financial crisis, English responds ‘‘I think we are in a much better shape. ‘‘We got through a pretty severe one last time, when no one was really ready for it. This time around you’ve got a shorter banking system, an investment community more attuned to the kind of risks that sit behind a credit crunch and a pretty flexible, resilient system.’’

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D8

nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

FMA chief takes the long view A significant crash is inevitable, it’s how we prepare for it that matters, Rob Everett tells Fran O’Sullivan

R

ob Everett, the still relatively new boss of New Zealand’s financial markets watchdog, is not setting out to be a party-pooper.

But, just 90 days into the job and on the third anniversary of the Financial Market Authority’s birth, he says bluntly the key issue for the FMA is confidence. ‘‘I don’t know what you feel but I feel confidence is fragile,’’ Everett confides 10 minutes into a lengthy (he does have a slight tendency to loquaciousness) exposition. ‘‘Yes, everyone’s more confident that they were six months ago and more confident than they were 12 months ago and all the rest of it. ‘‘That’s good, and that’s great and I’m not sure the FMA should take too much credit for that but markets are already beginning to show signs of quite a lot of volatility. ‘‘Equity markets globally? What do I know? But I guess it’s about to get a lot worse.’’

The former Merrill Lynch banker reckons ‘‘we’re all in line for a correction’’. He cites property prices — alltime highs in a whole bunch of places not just New Zealand. (‘‘London, where I came from, being another example of a quite bizarre property market’’).

All this is by way of prefacing his point that the FMA has to make sure people have confidence in the rules, in the regulators, in the infrastructure and how to navigate the financial markets.

In various speeches he is trying to make it clearer to people that a correction will come (‘‘unless I get fired very early’’) at some point in his term. ‘‘It’s unthinkable we won’t have a significant crash.’’

The FMA will step up its role in financial literacy and investor education — something Everett feels is particularly important as more New

Zealanders pile into KiwiSaver. So when the inevitable market downturn happens and the value of KiwiSaver members’ funds drop, they will be more inclined to take the long view rather than take fright. ‘‘I think it’s our job to try to find the areas where we can help people make decisions that will survive high interest rates, lower equity markets, property prices crashing, the odd bad apple in a barrel in terms of providers of financial services or financial advice or property syndicates for instance.

We’re not going to be naive that you can eradicate some of the harm that will come to people in markets. What we’re trying to do is create an environment where people feel that we have closed off the avenues of harm that didn’t need to happen. .

‘‘We’re not going to be naive that you can eradicate some of the harm that will come to people in markets.

What we’re trying to do is create an

environment where people feel that we have closed off the avenues of harm that didn’t need to happen.’’

Under Everett, the FMA will get

alongside other players including media to put branded messages out.

He is cautious about pushing standards so high in the financial advisory world that no-one will want to take on the added compliance burden.

It’s not all about cosying up to the industry players. Everett makes the point that more people have gone to jail in New Zealand in the wake of the Global Financial Crisis than in most other jurisdictions. ’’The director committee is definitely influenced by what we have done and are keen to hear about how they can avoid being locked up.’’

An indication of Everett’s style came with the Genesis Energy float where the FMA insisted on independent research. ‘‘Genesis showed with the right determination and the occasional punch thrown in public we can influence things so actually investors are getting a better ability to find information and read it.’’

In forums Everett is careful to float how the FMA might measure a hundred per cent success rate.

There are still a couple of actions hanging over from the finance companies’ bust. But he also plans to use the tools the FMA has been given under the Financial Markets Conduct Act as counter-measures to bad market behaviour. ‘‘I didn’t take this job just to sit here and wait for things to land on us. I took the job because I believed that, where New Zealand is with the rewrite of the legislation, with the FMA, with the acceptance that although the financial crisis played out a bit differently here than other places there were things broken — we’ve got the opportunity to move it forward — something that actually influences the industry, consumers, potentially influences the rulemakers and Parliament about what we want to use those powers for.’’

All eyes on the market watchdog LLOYD KAVANAGH MINTER ELLISON Kavanagh describes the new regime as a ‘‘once in a generation change, not only for [the FMA], but for capital markets as a whole’’.

He believes Rob Everett impressed at a recent industry presentation, striking the right tone when talking about the objectives of promoting confidence and informed participation in the market, and the balance he was seeking to strike between incentivising people to fully comply and at the same time, avoiding a ‘‘box checking’’ or ‘‘nitpicking’’ culture.

Ensuring the effective implementation of the FMCA will be the biggest challenge for the new CEO over the coming months.

The biggest technical issue for Kavanagh is how the register entry system, one of the two key elements of the new disclosure regime, is likely to work. ‘‘We’ve had a pretty bold vision painted by the ministry as to what that is expected to achieve,’’ Kavanagh said. ‘‘But we are still waiting to see what key elements look like — in particular, the entry register which will replace the prospectus as the repository of ‘all other material information’. ‘‘If it’s done well it will be a fantastic resource, which will put New Zealand disclosure and capital markets at the forefront of world practice. But if they

Brierley Penn sat down with three legal practitioners to get their take on the new Financial Markets Conduct Act and the remaining tasks for the Financial Markets Authority under recently appointed chief executive Rob Everett implement something that looks like the rather dense website they currently have with the old companies register then it will be very difficult for investors and commentators to actually find information. ‘‘There’re some really big opportunities in there for new products and services which is great, things like equity crowd funding and peer-to-peer lending, the new regime for managed investment products, the licensing arrangements and a general focus on growth markets, which I think is very encouraging.’’

Kavanagh said a number of directors and issuers are now seeking guidance around their new responsibilities. ‘‘I’m optimistic that the regime as a whole should help build appropriate and well placed confidence on behalf of investors. The regime as a whole is a significant change for New Zealand, but it is a change that is moving us towards the centre of the OECD practice. The benefit for issuers will be that if investors have more confidence, the issuer’s cost of capital should come down, as more investors participate in the market. I think the big challenge for the FMA is to make sure that vision is delivered on.’’

JOHN-PAUL RICE RUSSELL MCVEAGH John-Paul Rice considers an important focus for the FMA will be how well it works with other agencies to promote effective regulation of the market. ‘‘The market will be looking, for example, to see whether the principles of cooperation in the memorandum of understanding with the Commerce Commission in practice eliminate any risk of parallel, or at least closely sequential, investigations and noncourt enforcement action by the two agencies,’’ he says.

Continuing to negotiate the introduction of the FMCA and the inevitable bumps along the way in an open, consultative way, to ensure fairness for all participants will be a crucial aspect of Everett’s new CEO role. Industry participants are keenly awaiting announcements regarding the more detailed regulations to be released later this year. ‘‘We see a lot of positive changes made in the FMCA in terms of

disclosure to investors and remedies available where disclosure standards have not been met,’’ says Rice. ‘‘Where the rubber hits the road is largely set out in the regulations and we’re looking forward to seeing the phase two regulations when they are available. ‘‘The workability of the regime from an industry perspective often comes down to the detailed provisions, and we’re hoping the devils have now largely been banished.’’

ROGER WALLIS CHAPMAN TRIPP ‘‘Our Australian colleagues are envious of some of the things the FMCA facilitates,’’ says Chapman Tripp’s Roger Wallis. He believes the implementation of the new Act will facilitate development of new financial products, or at least simplify some process, while still providing for adequate investor protection.

Crowd-funding, and low cost, efficient further issues of shares or debt by

listed companies, are examples of initiatives which will set New Zealand apart from our Australian counterparts.

Overall, Wallis is optimistic about the impact regulatory changes are likely to have on the market. ‘‘An apparent pipeline of good quality financial products (whether equity, debt, or funds), some of which are enabled by modernised regulation, and clearer, more useful disclosure, should also help restore investor confidence and diversify away from real property investment.’’

However, issues do remain for the FMA to tackle under the leadership of its new CEO. Wallis suggests a fresh look at the law on financial advisers would be worthwhile. ‘‘Although reformed in 2008, some of the ‘red tape’ that has ensued has caused good people to leave the industry.’’ he says. ‘‘And some gaps and exclusions that are too wide mean unqualified people can still advise on some asset classes.’’

More importantly, he considers that some tax policy needs resetting to make markets more efficient, and remove tax biases that exist towards certain asset classes.

Finally, he suggests the FMA should begin to play a role in helping improve financial literacy. ‘‘A number of agencies need to work together to ensure a step change on this, and it needs to be treated more seriously by Government. ‘‘For example, why is basic financial literacy not a core part of the school curriculum?’’

D9

nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

New capital platforms getting on track in NZ T

Alexander Speirs

he innovative, creative and entrepreneurial among us are set to receive a new tool in their capital-raising arsenal, with the first domestic crowd-funding platforms now waiting official regulatory approval.

Gathering capital from a collection of public backers, crowd-funding utilises the public at large, soliciting and leveraging contributions of all sizes from a variety of people.

The crowd-funding phenomenon is a new addition to the small business owner’s toolbox in New Zealand — with businesses eligible to raise up to $2 million domestically from the crowd every 12 months. The framework was introduced in the Financial Markets Conduct Act 2013, laying out what is and isn’t acceptable while ensuring all providers are approved and registered.

More than US$5 billion is thought to have been raised globally from the crowd during 2013, growing from a standing start of only US$89 million in 2012. It’s seen the establishment of a new form of capital market with major providers emerging as substantial companies in themselves.

Crowd-funding as a source of capital will help bridge another gap in New Zealand market, aiding entrepreneurs’ transition ideas through to businesses. Though the NZX New Market initiative will facilitate taking small companies through to large-cap businesses, crowdfunding can contribute much earlier as domestic capital markets offer more comprehensive options for businesses at each stage of growth.

There are three main types of return investees can offer to the

crowd in exchange for their capital: ● Rewards-based crowd-funding raises capital for the broadest range of projects, recompensing investors with rewards or products for their contributions. ● Debt-based crowd-funding (peer-to-peer lending) raises capital in exchange for loan interest, with lenders competing in a reverse auction style bidding process. ● Equity crowd-funding raises funds for business, with investors purchasing an equity stake in the business and sharing in their future successes.

Though New Zealand is a little late to the party in establishing domestic platforms for crowd-funding of all persuasions, it hasn’t stopped

Taika Waititi used Kickstarter to help fund the American distribution of his hit movie Boy.

Best of the bunch INTERNATIONALLY

innovative Kiwis generating the capital they need.

Taika Waititi, the film-maker behind the instant Kiwi classic, Boy, raised more than $100,000 on KickStarter to help fund American distribution of his film in 2011. Former All White Tim Brown took just one day to reach the $30,000 he was looking for to help develop his sockless wool running shoes, raising $120,000 over five days in exchange for orders which will be fulfilled when the product is finished.

Undoubtedly the most bizarre crowd-funding venture originating here came earlier this year, when a comedian raised $164 after initially seeking $39 support to purchase a KFC family feast and return bus fares.

The most prominent crowdfunded project to date has been Oculus Rift, a venture developing a virtual reality headset for use with video games. The Oculus team took to Kickstarter to raise the requisite funds for the project to continue to grow, receiving more than US$2 million without relinquishing any equity in their company — the 9500 contributors were compensated through a rewards-based scheme which returned early versions of the product to those who contributed money.

Facebook purchased Oculus in March for US$2 billion in what CEO Mark Zuckerberg described as a ‘‘long term bet on the future of computing’’.

Had Oculus Rift’s early backers done so through an equity crowd-funding platform like Crowdfunder instead of Kickstarter, they would have made 200 times what they invested — receiving US$50,000 for their US$250 investment, instead of a prototype headset.

● Kickstarter — The gold standard for rewards-based crowd funding, Kickstarter has received more than US$1 billion since it was launched in 2009. Entrepreneurs looking for funding offer experiences, advertising, products and more in exchange for an equity-free investment. Officially open to New Zealand and Australian projects since November 2013, Kickstarter has so far channelled more than NZ$2 million through to Kiwi-based businesses. Successful New Zealand projects range from wearable cameras and 3D virtual tabletops through to comic books and documentaries.

Commission on successful projects: 8 per cent (5 per cent to Kickstarter, 3 per cent credit card) http://www.kickstarter.com/newzealand ● Lending Club — Despite not being available outside the United States, Lending Club has issued in excess of US$4 billion in loans since its inception in 2006. Applicants can receive between $1000-$35,000 for business or personal purposes, with investors receiving interest income based on the creditworthiness of the individual applicant. Rates vary between 6.03 per cent right through to 24.89 per cent with investors thus far earning US$379 million.

Commission: Investors, 1 per cent of all income; borrowers, 1-5 per cent of the loan amount. http://www.lendingclub.com ● Crowdfunder — The crowdfunding platform exclusively for business, Crowdfunder looks to connect existing small businesses and startups with investors seeking an equity stake in return for capital. The business lobbied hard for legislative change in the US which enabled them to operate an equitybased system. Aimed at investors with deeper pockets than other platforms, potential donors are screened before being able to actively participate and deals come with a recommended minimum investment of US$10,000. Open to businesses worldwide, a monthly registration is charged depending on the amount of capital being raised. http://www.crowdfunder.com

DOMESTICALLY

● Pledge Me — New Zealand’s largest domestic crowdfunding platform, Pledge Me has seen more than 500 successful local projects raise more than NZ$2.5 million since it went live in 2012.

Succsssful projects have tended to be of the creative variety, with books, movies and documentaries funded. Individuals and sports teams have also been successful in attracting funding for international events. The service is currently raising more than $50,000 per week for domestic projects.

Commission on successful projects: 8 per cent http://www.pledgeme.co.nz ● Snowball Effect — Now open for investor registration, Snowball Effect is in the final stages of securing its licence from the Financial Markets Authority so capital can start changing hands. Businesses seeking capital are assessed on their suitability for an equity offer-raising, then helped with creating and listing their offering for investment.

Commission on successful projects: Up to 6 per cent http://www.snowballeffect.com

Web funding channels come with fetters

C

Tracey Cross and Nicole McFarlane

rowd-funding and peer-topeer lending through the internet have arrived in New Zealand. Government has passed new legislation that encourages innovative seed companies to seek small amounts of investment via loans or shares, for start-up and growth, mainly via the web.

This initiative is liberating because it overcomes the requirements for small companies to have to comply with the (more onerous) disclosures of the Securities Act 1978 (and, from 1 December 2014, the Financial Markets Conduct Act 2014 (FMCA)).

The opportunity is likely to fire up small enterprises, but it comes just a little shackled by the FMCA and the Financial Markets Conduct (Phase 1) Regulations 2014.

The legislation allows for the raising of $2 million in aggregate for each of crowd-funding and/or peer-to-peer lending by an issuer (for crowdfunding) or a borrower (for peer to peer lending), in any 12 month period.

The gatekeeper for investors and issuers or borrowers is a new concept: a ‘‘prescribed intermediary service provider’’. The provider must be licensed, and will set up a website through which an issuer or borrower solicits investment. Investors also use the provider’s website.

Regulation is most sharply focused on the provider — who in turn, is the agent that monitors the issuer or borrower.

What Must the Provider Do? The FMCA lays out the steps for licensing of the provider. The Financial Markets Authority (FMA) has issued

guidelines for those seeking to apply for a licence to be a provider of a peerto-peer lending or a crowd-funding service.

It is obvious from the demanding requirements of licensing that fly-bynighters need not apply. Minimum standards must be met including: good character and capability of management and board; effective policies and processes (e.g. anti- fraud and fair dealing policies); systems and operations, including effective ongoing monitoring of issuers and borrowers (e.g. their reporting) ; sufficient and well monitored financial resources.

Licences will also come with certain conditions, amongst them: FMA must be informed if key persons change; records must be compliant; regulatory returns must be provided regularly; systems, policies and controls must be robust; net tangible assets must be positive, calculated monthly. Conditions may also be tailored to providers.

The entire process for licensing and on-going compliance is not simply ‘ticking the box’. The wider compliance regime includes FMCA requirements for fair dealing and financial reporting, and anti-money laundering legislation.

Under the Financial Advisers Act 2008, there are obligations if licensed entities act as brokers. Thus there is a raft of legislation to observe in applying for a provider’s licence. The FMA will help; outside advice is desirable too.

It’s a long haul. Indications are that some initial prospective applicants have faded, leaving a determined small group. Once licensed, providers need thorough due diligence on potential issuers or borrowers. They must also assess risks of investors not being repaid in full, and returns that are likely. Before shares are issued or loans

It is obvious from the demanding requirements of licensing that flyby-nighters need not apply.

Minimum standards must be met.

Tracey Cross (left) and Nicole McFarlane

made, providers will need to enter into a client agreement with potential investors. They must disclose information including: how investments will be made; financial products issued under the service; how investor money is received and dealt with; and charges being made.

What Must An Issuer or Borrower Do? An issuer or borrower does not have to be licensed. But, there are still hurdles — fewer than under the Securities Act (and FMCA.) The issuer or borrower will become a client of the provider. The provider

can charge for services. The agreement with the provider will need to detail what the issuer or borrower has to do so that the provider can monitor and check them.

Some of the issuer’s or borrower’s obligations to the provider include: ● Being who they say they are, with no record of misconduct. ● Being contactable, accurate address and contact details (to provider and investor). ● Making the appropriate disclosures. ● Providing financial statements regularly to provider and investor. ● Having excellent systems in place so that the business is run in an effective and transparent way.

So you want to invest?

A feature of the new regime is that adequate warning statements are published. The form of these is prescribed.

The warnings make it clear that investors may lose their entire investment. Investors must confirm they have read and understood warnings before they can use the provider’s service, and invest. The investor becomes a client of the provider, and may be charged a fee.

Will it be worth it? It’s likely this new channel for investment may take a while to develop. Comments from the market show investors have been willing to throw donations at new business ideas for a while now. This is a means of formalising support, probably increasing it. Some may be burnt in the process. But overall this seems a positive move in encouraging investment in small New Zealand businesses. ● Tracey Cross is partner and Nicole MacFarlane senior associate, at DLA Phillips Fox

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

NZ companies get ready for the rebound For the first time since the Global Financial Crisis all the pieces are in place supporting the rebound in merger and acquisition activity in New Zealand.

Fuelled by the partial sales of government-owned Mighty River Power, Meridian and Genesis, and increasing optimism in the strength of our economic recovery, 57 per cent of respondents to EY’s just-released NZ Capital Confidence Barometer expect deal volumes to improve in the next 12 months.

And 43 per cent of these Kiwi respondents plan to pursue acquisitions, compared with 31 per cent six months ago and 27 per cent in April 2013.

The latest results show executives are more optimistic, at the global and local level. Overall, 79 per cent of New Zealand respondents believe our economy will improve in the next 12 months — one of the highest confidence levels

EY’s Capital Confidence Barometer shows optimism globally and locally, writes Andrew Taylor among the 48 countries in the survey.

Last month, we surveyed 816 respondents globally, representing 20 industry sectors. The results, indicating a rebound in confidence in the public markets, are also reflected in another just-released survey, covering New Zealand’s private equity and venture capital sector. After a grim 2012, when total private activity (investments and divestments) was just $188 million, the latest NZ Private Equity and Venture Capital Monitor reveals total activity at $1.1 billion in 2013 — almost back at the 2011 level of $1.4 billion.

Total investment value in the private market was $456.2 million spread across 82 deals, compared with $111.4 million from 62 deals in 2012. Of those planning deals in the public markets, 74 per cent of respondents have at least two deals in the pipeline.

Powering this is, in part, better access to credit. More companies now plan to use debt to help fund acquisitions — 57 per cent of respondents, compared with 27 per cent a year ago. So, despite record cash balances, executives are seeking to maximise returns from debt financing,

Australasian firms show confidence Barometer shows big boost in optimism in the region The number of executives who feel confident about corporate earnings increased sharply from 46 per cent six months ago, to 77 per cent in the latest EY Capital Confidence Barometer for Australasia.

This barometer also shows more Australasian companies are confident across a range of areas: credit availability, equity valuations and short- term market stability.

Evidence of a sustainable recovery Despite the widespread optimism, there are few signs that companies will throw caution to the wind. Reined in by shareholder pressure and boardroom caution, corporate growth strategies are being held to exacting standards.

Boards listening to shareholder activism Shareholder activism has elevated a number of items on the boardroom agenda, particularly cost reduction.

Only 13 per cent of respondents said shareholder activists had minimal impact, demonstrating their growing ability to put the board under pressure. Shareholder activists typically focus on organisations with high expense ratios, multiple, disparate and sometimes non-core operating units, and a history of mixed returns from their capital allocation. As activists become increasingly influential, the board response has been to focus on: operational efficiency; spinning off non-core units; and returning capital to owners via buybacks and dividends.

Clear focus on steady growth More than half of respondents (56 per cent) are planning to generate more than 25 per cent of their anticipated growth through acquisition in the current fiscal year. In line with this, 54 per cent say ‘‘growth’’ best describes their organisation’s current focus. Although this figure appears to compare unfavourably with the 70 per cent who reported growth as their focus six months ago, this overwhelmingly positive response was likely buoyed for Australian respondents by the completion of the Australian Federal election and in anticipation of greater political certainty thereafter. At the time, we noted this positive sentiment would likely moderate. As expected, companies now have a more realistic view of market possibilities and regulatory constraints. However, we expect the corporate focus on growth to climb — slowly but steadily — over

Top investment destinations for Australasian companies 1. China 2. India 3. Malaysia 4. Singapore 5. Thailand

Top investment destinations for global companies

1. China 2. US 3. India 4. UK 5. Germany (Australia 22; New Zealand 46)

77 56

per cent of executives feel confident about corporate earnings

per cent are planning to generate more than 25 per cent of their anticipated growth through acquisition

65 77

per cent say they are putting more deals on the boardroom table.

per cent are looking at 1-3 transactions at any given moment

the next 12 months.

For the past 18 months, just more than a quarter of companies have consistently reported cost reduction and operational efficiency as their main focus. Just under one in five are focused on maintaining stability.

Only a very few — just 2 per cent — are still focused on survival.

Higher-risk organic strategies There is renewed interest in higherrisk organic growth strategies. Six months ago, lower-risk strategies dominated, with companies largely concentrating on growing core services in existing markets. There has now been a dramatic shift, as companies look to increase R&D and exploit technology to introduce new products and services. They are also keen to move into new markets and geographies.

More deals being put to boards Nearly 65 per cent say they are putting more deals on the boardroom table. And these deals are getting larger: 26 per cent were looking to engage in larger acquisitions (>US$500M), up from 8 per cent a year ago.

Overpaying for an acquisition is the most common reason for it failing to

meet expectations, with 26 per cent citing this issue. Executives estimate that 36 per cent of unsatisfactory deals came down to unforeseen liabilities and poor operating cost assumptions that weren’t picked up during due diligence. Other reasons included: poor integration; margin deterioration when new owners failed to optimise costs; and lost sales or customers from a decline in service or product quality.

Deal metrics improving In the past 12 months, respondents’ confidence in the number of acquisition opportunities has jumped from 31 per cent to 57 per cent their confidence in the quality of acquisition opportunities from 27 per cent to 37 per cent; and their confidence in the likelihood of closing deals by from 20 per cent to 31 per cent..

Companies anticipate increased deal pipelines Three in 10 respondents anticipate their deal pipelines will increase in the next 12 months. Just 5 per cent expect them to fall. Of those with deals in the pipeline, 77 per cent are looking at 1-3 transactions at any given moment, with 9 per cent considering five or more.

spurring the shift from cash to debt.

Respondents say their main objective is to gain share in existing markets (83 per cent compared with 57 per cent six months ago). Last October, 75 per cent said a share in new markets (products or geography) was the major factor behind their deal-making intentions. This is now only 17 per cent.

Overall, the latest survey shows a shift in the agenda, from the costcutting and capital preservation focus of a year ago to a strategy of raising and optimising capital. In April 2013, only 9 per cent of respondents s were primarily focused on capital raising; the figure is now 28 per cent. Only 14 per cent are focused mainly on preserving capital compared with 32 per cent a year ago.

Another big change is hiring intentions. In New Zealand and globally, the survey reveals a big drop in job creation expectations.

In New Zealand, only 36 per cent

of respondents expected to create jobs or hire talent in the next 12 months, compared with 54 per cent six months ago and 68 per cent in April last year.

Some 57 per cent of respondents said they would maintain their current workforce size (compared with 38 per cent last October). Only 7 per cent were planning to cut staff numbers, compared with 32 per cent in April 2013.

These figures are consistent with EY’s global results. As in other countries, New Zealand’s hiring intentions are likely to be affected by the global trends such as ‘‘future of work’’ issues (eg, the skills gap and competition for talent) and digital transformation (eg, big data, the cloud, mobile). ‘‘Global rebalancing’’ and future of work issues were cited by Kiwi respondents as the trends most likely to impact on their business and acquisition strategy in the next 12 months.

Shifting business out of the comfort zone Quentin Quin

The Better by Capital programme has accelerated the ability of companies to access alternative capital markets, improved their capacity to be ‘‘match fit’’ when sourcing new capital, and shifted their marketability away from traditional ‘‘vanilla’’ type financial structures to support growth.

The deep dive process shifts a business’ comfort zone and provides scope to reprioritise activities for growth and take advantage of broader networks or strategic capital, for example partnering with a large multinational that can enhance internationalisation.

The Better by Capital team is currently working with 42 companies to assess their financial bandwidth and forecasted requirements. A further 35 companies are in the final preparation stage of meeting investors — including 22 firms who are using NZTE’s international investment network to action their capital-raising strategies.

Twelve companies have achieved their financial goals and $10.4 million has been invested or reprioritised across seven companies to achieve or accelerate internationalisation.

Capital has been mobilised by leveraging both domestic and international networks, and using a range of tools including debt and equity.

Another five companies have a capital development plan that underwrites their future sustainability.

Over the past 10 months we have delivered 70 ‘‘Challenge Workshops’’, in which a company’s management or directors are challenged on their growth, marketing and investment strategy by private sector advisors.

Twenty companies have participated in ‘‘Ready Set Grow’’ sessions — interactive seminars that provide the opportunity for companies to learn about capital fundamentals from a range of internal and external advisors. We have learned we can achieve better results by asking people from the outset, ‘‘How big could your business be if you removed other constraints?’’

We started doing this because time and time again we saw companies whose aspirations, capability and vision were constrained because they lacked a commercial framework that laid out their business plan, resulting in external parties defining the parameters in which they could operate. When people thought about what success looked like to them, their load lifted and it was easier to consider scale, strategy, growth, internalisation and capital requirements. This resulted in a more focused approach

Quentin Quin

Better by Capital ● Administered by NZTE ● Private sector partners ● Launched July 2103. ● 215 businesses participated ● 12 companies achieved financial goals when addressing a range of capital issues, including succession planning, debt-raising, shareholder structures and structured exits. This is a positive outcome — more companies going into markets in a more controlled way creates a more sustainable investment ecosystem.

If major international investors see a constant, credible source of innovation, deals and opportunities coming from New Zealand, New Zealand becomes a market of interest for strategic foreign capital. This opens up the world for the next generation of New Zealand entrepreneurs, and the recycling of capital from one good investment to an entrepreneur looking to deploy the gains to another.

There has been discussion previously about the need for increased capital flow to boost exports. With this in mind, it is encouraging to note that the profile of capital providers is also changing, with NZTE receiving a lot more interest from high net worth individuals from across New Zealand looking to expand or divest their investment opportunities and build out their exposures or portfolio.

In addition to strong corporate interest from China we are also seeing increased interest from Australia, Britain, the Middle East, North America and Southeast Asia. ● Quentin Quin is General Manager Capital, New Zealand Trade and Enterprise (NZTE).

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

KiwiSaver reboots capital markets The well-capitalised NZ Super fund is also giving private investors confidence, say ASB leaders

A

Bill Bennett

SB executive general manager Steve Jurkovich says KiwiSaver has the power to rejuvenate popular involvement in New Zealand’s capital markets and over time the government supported voluntary savings scheme will increase the sophistication of everyday investors.

Jurkovich says many of today’s investors have lived through major challenges: the 1980s market crash; the technology bubble and crash in the late 1990s and, more recently, the global financial crisis and collapse of New Zealand’s finance companies.

These are all serious stumbling blocks, which undermined confidence. ‘‘Taken together with our tax rules, it’s not surprising most people have taken refuge in property, it’s been a far more comfortable investment.’’

However, Jurkovich says KiwiSaver is changing that: ‘‘People didn’t take too much notice of their KiwiSaver accounts when there was only two or three thousand dollars tucked away. Having $100 thousand or more invested in the funds sharpens their interest considerably. People start watching the performance on a regular basis and reading financial news.’’

He says we are already reaching the point where ordinary New Zealanders have considerable sums in their KiwiSaver accounts and that is only going to increase. The first step is that they become more engaged with KiwiSaver, they look more

ASB’s Steve Jurkovich (left) and Mark Heer.

closely at their accounts and the returns. From there they take a greater interest in the structure and management on their investments.

That leads to a greater engagement with other forms of investment.

Jurkovich says alongside the KiwiSaver effect there are other changes to the investment world that put everyday investors at ease. ‘‘There’s never been more regulation and that brings more confidence. There’s also more knowledge and understanding.

We’re now seeing customers ask questions about risk versus return.’’

And now there’s a new generation of start-ups attracting mainstream investors. Jurkovich says Xero’s success has done much to draw attention to equity markets.

•

•

•

Overall he is bullish about the state of New Zealand’s capital markets. He says the well-capitalised New Zealand Superannuation Fund is also helping give ordinary investors confidence.

Equity capital markets and debt capital markets are in good shape.

In the internet age investors recognise a great idea can just as likely come from Auckland as from New York or Silicon Valley.

Steve Jurkovich

Jurkovich says investors are now looking to reweight the amounts they put in private equity. ‘‘It’s never been a better time for corporations and larger companies looking for finance, New Zealand is in a good place.’’

It’s not just local sources of capital, he says. ‘‘More than ever the global capital markets are prepared to back a good idea wherever it comes from.

In the internet age investors recognise a great idea can just as likely come from Auckland as from New York or Silicon Valley.’’

Jurkovich sees a major opportunity emerging with owners who have ridden through the economic cycle now wanting to capture some of the value that disappeared during the GFC. ‘‘They’re not getting any younger. There’s a generation of owners who are looking at their options for a transition and that creates opportunity for companies looking to divest or roll up other participants in their industry.’’

He says if you were 65 and thinking about selling when the GFC hit, you’ll now be in your 70s and still thinking about the sale — only now the valuation is likely to be much closer to what you were looking for.

Jurkovich says ASB is different from its rivals because it has a dedicated team in place to help people manage transitions and growth. He says in the past this kind of activity was mainly left to the investment banks and the large accounting firms.

However those organisations needed a degree of scale to make the process work for everyone concerned.

ASB is pitching its transition team at a New Zealand-sized scale, which is effectively the mid-market with a strong emphasis on the rural economy. Jurkovich says his operation is geared to deal with the conditions in its home market and the bank’s brand is likely to be less intimidating to a mid-scale agribusiness owner than a multinational outfit.

The same approach works further up the market in the agri-capital business where ASB’s rural team lead by general manager for rural banking Mark Heer are able to help their customers understand what global investors are looking for — and just as important, what they are not looking for.

Heer says there’s a move in these businesses to look more at the total balance sheet, which is both debt and equity. ‘‘Traditionally it has been mainly around the debt part of the equation’’.

He says this links to succession planning, which is something business owners haven’t really discussed with their banks in the past and was a problem during the GFC as most of the options were taken off the table.

One of the roles of the bank is to help business owners become ‘‘investor ready’’ either as part of secession planning or in order to raise additional capital.

Not enough big local fish for savings pool — page 18

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

New Zealand’s stars ride N

ew Zealand’s brightest technology growth companies appear immunised against an epidemic sweeping through the global industry.

The disease is real enough. Fifteen years after the dotcom boom imploded, Silicon Valley investors worry a second tech bubble is about to burst.

A number of sizeable companies — many operating in the social media sphere — previously had stratospheric valuations that don’t stand up to conventional financial analysis.

Wise heads know that if promoters have to resort to phrases like ‘‘this time it is different’’ or ‘‘a new economic paradigm’’ when justifying a company’s high valuation, trouble will surely follow.

When investors in one technology sector sneeze, everyone in the industry catches a cold. Technology stocks across the board have been volatile for the past two months. Last week Amazon, one of the world’s largest online retailers, lost 10 per cent of its value in a single day. Bearish sentiment is global with the price of locally listed companies like Xero and Wynyard Group rising and falling in line with the overseas markets.

The current volatility makes it a tough time for young technology companies to find the money they need to grow. On the other hand, it’s a good time for companies, like New Zealand-based online accounting challenger Xero, which already had substantial funding in place.

In October 2013, Xero raised NZ$180 million of fresh capital. The money came from US and New Zealand investors including existing Xero

Why are NZ tech companies seemingly immune to the financial epidemic sweeping the globe? Bill Bennett investigates shareholders Matrix Capital Management and Peter Thiel’s Valar Ventures.

Xero CEO Rod Drury says: ‘‘This year’s market volatility validates our strategy of raising capital ahead of our needs last year. We’re now seeing the difference between those companies who have already been funding with those who haven’t.’’

Having this war chest gives Xero an edge over its rivals at a strategic moment. ‘‘If you’ve got funding in place, there’s less likelihood of your

If you’ve got funding in place, there’s less likelihood of your competitors being able to get the money they need to grow. And that gives us a window of opportunity.

Rod Drury

competitors being able to get the money they need to grow,’’ Drury says. ‘‘And that gives us a window of opportunity.’’ He says now would not be a good time if you needed to raise money.

Point of sale specialist Vend is in a similar position. Earlier this year it closed a NZ$25 million funding round co-lead by Peter Thiel’s Valar Ventures and Australia’s Square Peg Capital. This followed the NZ$8 million Vend raised in 2013 and NZ$3 million raised in 2011 and 2012.

Crime-fighting software developer Wynyard Group took a different route to build its capital. ‘‘Wynyard raised NZ$65 million at IPO and a further NZ$35 million through a placement earlier this year to give us fuel in the tank to attack the much larger deals we are seeing in the US market and build partner channels to market earlier,’’ says CEO Craig Richardson.

Mark Ryan from Snakk Media, which raised more than NZ$6 million locally earlier this year — see sidebar — says building financial reserves early is a smart move. ‘‘It doesn’t feel like it’s a long time since the global financial crisis. If you didn’t have money under the mattress when that hit, your entire business would have been on winter rations.’’

Investor Lance Wiggs says the fastgrowing New Zealand technology companies have something their US counterparts don’t: ‘‘They all have revenue. That makes them quite different from the likes of Facebook or Twitter that may measure users in billions but make relatively little money from them.’’

Wiggs says the New Zealanders are focused on building long-term sustainable businesses. In contrast a company like Twitter is good at gaining customers, but it could all be gone tomorrow. Social media firms run the risk of killing the business when they try to earn revenue.

He says another difference between New Zealand and the US is that local companies are much more conservatively valued. continued on D13

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

out tech market volatility continued from D12

Last year Wiggs tried and failed to set up a public investment fund to finance early stage technology companies in New Zealand. Wiggs’ Punakaiki Fund was looking for $20 million, but only managed to raise $3.3 million. Since then Wiggs has set up a private fund. ‘‘We just went out to investors and raised $1.5 million of private money, I’ve already invested that.’’

Rod Drury says there’s a flight to quality when markets are volatile. ‘‘People look closer at business models. We have the customer numbers, but we also have the revenue growth.’’

Drury says in the past investors have underestimated the power of the software-as-a-service (SaaS) model. In the past software was sold as a product for a one-off fee and maybe additional upgrade revenue.

SaaS companies like Xero collect monthly subscription fees. Drury says that money just keeps on coming in every month.

Xero is using its cash to build the business as it aims to dominate what is essentially a mature market for small to medium-sized company accounting in the US. The company has already done this in New Zealand and Australia.

When Xero arrived on the scene seven years ago, the idea of selling accounting software as a service was radical. The company won business locally coming from left field with a new value proposition for customers.

It needs to keep up that momentum as it tackles the US. Drury says that means attracting the best talent in an incredibly mobile market and continuing to build the best relationships. He talks of a cycle: ‘‘You get the best capital to get the best talent, this means you can get the best deals, which then means you have access to the best capital.’’

In March when Vend announced its latest capital raising, CEO Vaughn Rowsell said the money was earmarked to fund growth. He wrote in his company blog: ‘‘We’ll be using this money to expand our presence in North America and Europe, beef up our awesome team so we can continue to delight our retailers with new features they’ll love and amazing customer support, and continue to build relationships with resellers and partners from all over the world.’’

Like Xero, Vend is chasing a mass market; both need to bulk up and sell high volumes through partners.

Wynyard Group has a different business model. CEO Craig Richardson says: ‘‘Wynyard helps prevent and solve serious crimes. We have built a market leading advance crime analytics platform helping solve growing problems for large government agencies and corporates. We are in a position to shape this new market it as it grows and there are no dominant players. Wynyard has a high-value rather than volume business model where there is significant price upside and customers are contracted for 3 to 10 years.’’

Wynyard has only been operating for two years, yet research analysts like Gartner and Chartis already rate the company as a market leader.

Richardson says: ‘‘Our end game is to build a highly profitable company with lifetime customers. While the US sector is important to Wynyard, the opportunity is global.’’

Drury says most tech people will understand the current downturn on the markets is a short-term thing. ‘‘Our business fundamentals haven’t changed. The weird thing is, it doesn’t really matter to us what the stock market does. It doesn’t bother us on the way up, it doesn’t threaten us on the way down.’’

Likewise Wynyard’s Richardson is sanguine about the tech stock downturn. ‘‘The $900 billion trans-

Wynyard Group CEO Craig Richardson

Picture / Sam Frost

Capital raising not in Mega’s sights Although based in New Zealand and offering cloud-based services, in some respects Kim Dotcom’s Mega looks more like the US-based social media companies than the other local technology growth companies.

Mega is building customer numbers by offering an attractive free file storage and encryption service.

Chief executive Stephen Hall says for now Mega is focused on growth rather than earning immediate revenue: ‘‘We’re burning cash current, but once we hit critical mass we will roll out other revenue-based services’’.

At present the company operates on the so-called ‘‘freemium’’ model.

Customers get so much file storage for free; if they want more they can pay a subscription. Only a few customers pay money today, but Hall says that will change.

He says capital raising isn’t planned as the company prepares for a backdoor listing on the NZX through TRS. He says the company already has substantial funding on hand from investors in New Zealand and from overseas. However: ‘‘Like all early stage companies we may need to raise additional capital later, but we have no plans to do so at this time’’.

Mega’s appearance on the NZX was originally scheduled for the end of May, but Hall says the date has now been set for June 30.

He says the threat of a regulatory brake on the listing has passed and the company is now working through the national crime problem Wynyard helps solve and the $21.7 million revenue booked in 2013 helping the world’s leading government agencies and corporates indicate Wynyard is a real business with a compelling value proposition and robust business model. Our share price is up

Kim Dotcom’s Mega launch, held at his mansion last year.

process. ‘‘We have to develop a profile, that’s like a prospectus. The document is at an advanced stage. ‘‘We also need to prepare an independent report for shareholders.

Simmons Corporate finance is handling the document; it’s not a valuation but will provide shareholders with a suggested course of action. That is also at an advanced stage.’’

After that, the deal has to be approved by the NZX. The business is no stranger to controversy, Mega was born from the ashes of Kim Dotcom’s Megaupload after the file serving — some say copyright piracy — operation was put out of business following raids in January 2012.

— Bill Bennett

more than 100 per cent since listing.

We have sufficient capital to execute our growth plan. The only headlines I’m interested in at the moment are the ones I know our products have helped our customers create.’’

Though local share prices are linked to global markets, for the most

part New Zealand’s young technology companies are immune from the deep-rooted problems facing American technology stocks. Unlike their international counterparts, they have conservative valuations more closely linked to their revenue generation than their ability to create publicity.

SNAKK MEDIA In April 2013 NZAX-listed Snakk Media went back to investors looking for $2 million of fresh capital. CEO Mark Ryan says the company had a large number of shareholders, but little liquidity so it offered shares at a 20 per cent discount and talked to its high net worth investors.

More than 1200 investors applied to take part and the company received a total of $7.5 million.

Snakk scaled back the applications and found an additional $600,000 through a private placement to raise a total of $6.5 million.

Snakk was co-founded by Derek Handley of The Hyperfactory. In Ryan’s words: ‘‘Snakk provides the plumbing to sell advertising across multiple mobile platforms’’. In effect it sells mobile advertising for larger organisations, taking a small fee each time an ad is served. It runs campaigns on social media services like Facebook and Twitter.

Ryan says Snakk has a strong balance sheet, is growing at 83 per cent year-on-year and advertising revenue is climbing faster than Facebook’s or Twitter’s. He jokes that at the current burn rate, money raised from investors will last until February 2021 so long as he maintains the status quo. However, that’s not the plan. Some money will likely be used to fund the acquisition of another business or unique technology, but the bulk will be spent on expansion.

Snakk’s business is mainly in Australia and NZ. Ryan says the next stage is Southeast Asia, with 80 to 130 million potential customers. He says they are substantially different to those in Australia and NZ because: ‘‘There’s no such thing as a second screen.

They do everything through mobiles. That makes them a very different advertising proposition’’.

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

Corporate currency critical for success SMEs are a major contributor to New Zealand’s current economic upward trajectory, says Simon Power

E

conomically, things are looking up in New Zealand. Consumer confidence is up and business confidence is sitting at a 20-year high.

Though we are excited about the current market climate, we must remember that the economy is cyclical.

In the words of Sir Isaac Newton, what goes up must come down. The length of this current trend will largely depend on how carefully we manage growth and the strength of our people.

The New Zealand economy grew by 2.7 per cent in 2013. After a drought-affected first half of the year, growth accelerated to around a 4 per cent annualised pace in the second half of the year. The lift in activity has been consistent across a broad range of industries. The economy remains on track to grow strongly throughout 2014. Business confidence recently reached its highest level since the early 1990s — the last time the New Zealand economy was transitioning from recession into a period of strong economic growth.

Small and medium-sized firms of up to 20 employees (SMEs) are an important part of the New Zealand economy. According to the latest data from Statistics New Zealand, they account for: 97.2 percent of all enterprises, 30.2 percent of all employees, and an estimated 27.8 percent of New Zealand’s Gross Domestic Product.

SMEs have become increasingly optimistic about their own activity and profitability.

Our SME customers are telling us they expect strong revenue growth and opportunities to grow their busi-

ness. Still, some challenges remain for them. These include start-up businesses trying to manage tight cash flow, establishing a customer base, and marketing themselves. It also includes companies experiencing high growth. Many SMEs tell us they need help with the right advice across financing growth, accounting, hiring staff, and having an active online presence to find and prospect customers. SMEs have a growth agenda that will propel New Zealand forward and Westpac is alongside these companies providing tools and advice to facilitate growth.

In recent years, small to medium enterprises and smaller exporter businesses have been focused on reducing debt and getting through tougher economic conditions. With the current growth climate, small businesses are faced with new challenges. This change in outlook puts a positive pressure on businesses as they strive to meet expectations for customers in the market for increased goods and services.

Arguably, the most important element for business success is the quality of their people. Fostering the development of talent and retaining these individuals is pivotal to the success of small businesses. Often referred to as the ‘‘corporate currency’’, high quality people are valuable and have the ability to assist in the growth and ongoing achievement of businesses. We recognise that SMEs are the engine room of the New Zealand economy. We recently held forums throughout New Zealand and we listened to what small business

Business confidence recently reached its highest level since the early 1990s — the last time the New Zealand economy was transitioning from recession into a period of strong economic growth.

Simon Power

owners need help with, in order to grow their business.

The strength and expertise of the people at Westpac are fundamental to the support we can provide to SMEs. Westpac is intent on delivering practical and easy to use solutions for time and resource constrained SMEs. Our ‘‘Managing Your Money’’ workshops target three key areas including funding and financial management, sustaining cash flow and managing for growth. These workshops are available nationwide in local communities.

As a business owner you can up skill your financial knowledge and at the same time get to network with other small businesses.

In the constantly evolving digital economy we live in it is vital for businesses to have a solid online

presence. In 2012, Westpac launched an initiative with MYOB that enables New Zealand businesses to get online for free. Most New Zealanders now research online before purchasing products or services, yet an incredibly large percentage of New Zealand SMEs have no internet presence. Our Get Online campaign signals our commitment to helping businesses grow by enabling them to have a presence online, including e-commerce facilities. The offer is available to all small businesses, regardless of whether they are Westpac or MYOB customers.

Westpac has released digital systems for New Zealand’s smallmedium businesses providing practical support in two key areas that are critical to business success — cash flow management and customer experience. Get Paid supports real time payment processing with no need for extra hardware or plug-in devices.

Get Feedback allows SMEs to track their customers’ satisfaction levels, interaction scores and verbatim feedback via an online dashboard.

Internally as management and externally as customers, people are fundamental to the success of any small business. Through the Get Feedback application, SME’s can capture and analyse their customer feedback and build better engagement. They will be able to track, in real time, how customers feel about

the service they offer, manage customer interactions and receive valuable verbatim feedback.

Get Feedback gives SME’s access to the kind of tools that help organisations significantly improve customer experience, growth and retention. Westpac sees huge opportunity in helping SMEs drive their customer experience and this initiative was the first of its kind for a bank in New Zealand and Australia.

Financial institutions like ours are working closely with customers to prepare them for growth. When we’ve been in a hunker down environment, and all of a sudden demand for goods and services lifts, we must re-gear businesses to prepare for that growth.

It is a different phase, but it is an exciting phase, because it means jobs, it means good wages, it means communities and towns around New Zealand are on their feet and doing business.

SMEs are a major contributor to New Zealand’s current economic upward trajectory. It is important that we recognise this and foster the growth and development of small businesses. Westpac is actively working with SME’s to provide them with the tools and support necessary for them to flourish in the current growth market. ● Simon Power is General Manager, Business Bank & Wealth — Westpac NZ

Capital markets need number-eight wire It’s time to engage in a little disruptive thinking, says Alex Malley Sir Ray Avery, inventor, scientist and social entrepreneur, recently shared his life story with a packed lunchtime session at CPA Australia’s Congress; a colourful and rich career epitomising the ‘‘number-eight wire’’ mentality. Avery’s innovation in developing a low cost optical lens has brought the gift of sight to millions and sits proudly on the long list of New Zealand innovations that have genuine world-wide impact.

Giving investors sight through a growing haze of complexity in capital markets is recognised as an issue globally. In an environment of intensifying resource and credit scarcity, informing the evolving needs of investors in a rapidly changing world is a central challenge for the accounting profession.

There is a level of misunderstanding surrounding the modern role of the professional accountant. For centuries, we have balanced books and

produced financial statements outlining in fine detail the tangible and financial assets of businesses.

The rules of financial reporting have been written and rewritten with increasing layers of complexity.

The popular perception of accountants as safe, solid measurers of historical data remains persistent while the reality is of an innovative and transformative strategic resource advisor.

Having access to relevant information is at the core of the challenge of applying capital productively.

Today’s markets demand real time information and accessible insights on a more nuanced, diverse set of measures than traditional annual or half yearly accounting allows. There are growing pockets of innovation within the accounting profession globally, and an emerging recognition that step change is needed.

I have taken a seat on the Inter-

national Integrated Reporting Council (IIRC) and believe if we can reflect all aspects of entity’s capital in Integrated Reporting we will deliver the full breadth of information, covering tangible and non-tangible assets, that investors and other stakeholders are increasingly demanding from company reports.

Similarly, through my work on the Advisory Group of HRH Prince Charles’ Accounting for Sustainability Project (A4S) I am working on promoting the concept of Integrated Thinking as a key enabler for Integrated Reporting. This offers the opportunity for the accounting profession to develop new methodologies for sustainable wealth creation. It is also breaking new ground for the central role of the modern CFO as a strategic resource advisor to work across all areas of business wealth and value creation.

Concurrently, the reliability and soundness capital markets have come to expect from the accounting profession — those qualities afforded by rigorous auditing and assurance — remain paramount.

CPA Australia recently hosted the inaugural Evolution of Auditing Forum where Professor Miklos Vasarhelyi of Rutgers University in New Jersey, inventor of continuous auditing technology and a pioneer in advanced data analytics, evoked Steve Jobs’ radical approach to consumer electronics as an analogy for the auditing profession — ‘‘how can

we make auditing something people use twice a day — like toothpaste’’. His challenge was clear — ‘‘how can we simplify our messaging to equate to the ethos of our customers ‘being able to do everything in three clicks or less’’’.

This is not rhetoric common in the accounting profession, but it is this kind of disruptive thinking that is required to address a potential crisis of relevance and to meet a rapidly mounting set of challenges facing capital markets.

Avery has been named a ‘‘rebel with a cause’’ — a title denoting that willingness to challenge the status quo often treated as a virtue in New Zealand and across the ditch in Australia while censured in other parts of the world. On both sides of the Tasman, we punch well above our weight in the global accounting profession and global business innovation — it would be poetic if these strengths could merge to offer the number-eight wire global capital markets yearn for. ● Alex Malley is chief executive of CPA Australia

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

Bringing knowhow to the people Grassroots education on why capital markets matter is an initiative the industry needs to consider, says Michael Barnett

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veryone reading this Capital Markets 2014 report probably appreciates building capital markets is vital to ensure New Zealand businesses can respond to opportunities and grow the economy.

But when I ask around in the wider community what capital markets do it is clear most people have little idea how it complements other sectors of our financial system such as the banks.

In the aftermath of the Global Financial Crisis (GFC) and the collapse of a number of finance companies, there continues to be a level of scepticism towards our capital markets.

For many, foreign investment into our capital markets is perceived as a threat to New Zealand. And although we are saving more than they have in the past, there continues to be a reluctance to look beyond property and/or the banks to the opportunities of investing in the New Zealand or international capital markets.

Even within the business community, the role and potential of the capital markets sector to mobilise local and international savings and channel capital to its most productive uses is little understood.

In OECD countries, New Zealanders are regarded as among the most innovative, creative people, but show a poor conversion rate of Kiwi ideas into successful commercial ventures (unlike in similar small nations such as Sweden or Denmark).

The best idea in the world for a new product or service is useless without the support of a business model and plan to attract investors.

On the other hand, the world is

Government is continuing to implement.

I suggest the capital markets industry itself now needs to step up and look beyond its own improvement, to what it could do to lift its profile and branding with the rest of New Zealand.

It needs to take an initiative to better explain to ordinary New Zealanders what it’s about – the role and contribution it makes to lifting living standards, creating jobs and offering oppor-

We hear a lot about rich foreign investors wanting to settle in New Zealand, and in my view we need to be smarter and cleaner in the processes we apply to attracting this group of immigrants. currently awash with capital looking for an attractive commercial relationship and return. We hear a lot about rich foreign investors wanting to settle in New Zealand — and in my view we need to be smarter and cleaner in the processes we apply to attracting this group of immigrant.

It is no different for the large amounts of international capital we could be attracting to help our businesses, especially exporters, to grow.

Of course we don’t want suspect migrants or laundered capital to seek a home in New Zealand.

But it is plain to me that substantially increased foreign investment via our capital markets is essential if we are to convert the potential of more Kiwi

businesses to be global players, let alone achieve the Government’s target of lifting exports to 40 per cent of GDP by 2025.

The New Zealand capital market is too small to do the job on its own.

But if we are serious about increasing our capital markets to the scale required to help build a more productive and internationally competitive economy, we need to find ways to overcome the suspicions many raise when proposals to bring in more offshore capital are raised.

The 2009 Capital Market Development Taskforce made many recommendations for building New Zealand’s capital markets and addressing issues facing the sector directly, which the

tunities for people with capital to invest. And it needs to do so with a long game in mind.

For example, a school-based grassroots education course that explains what capital markets do, why they matter for New Zealand and the opportunity they provide would give young Kiwis an insight they would carry for the rest of their lives. For the industry it would be an investment in the future through the next generation of New Zealanders.

Another initiative that the industry needs to take responsibility for is to explain the benefits of foreign investment to New Zealanders, and do so in a way that shows the connections between international investment and

increased employment and export returns that otherwise wouldn’t exist, and wages and returns that are higher than they would otherwise be.

Some 95 per cent of New Zealand’s businesses are small and medium sized enterprises (SMEs). They are the backbone of our economy and the key source of economic growth, job creation and innovation. It is well known that SME financing primarily depend on bank loans.

Currently the share of SME financing through capital markets is small, but in some overseas markets, especially Asia, facilities that SMEs can tap into have been established both for attracting equity and servicing debt — in which listing criteria and disclosure requirements are eased.

The importance of promoting longterm financing for SMEs in the context of investment is an obvious area our market could also look into.

In my view, the fear and suspicion of foreign investment and the lack of understanding about the role of our capital markets are invariably misguided, but need to be addressed headon. There is a job the industry could also do better; to connect innovative New Zealand businesses with prospective foreign investors..

For a small, relatively isolated but innovative and adaptive nation, the fact that international investors continue to show interest is a vote of confidence in the quality of our businesses, and our entrepreneurs and workforce. ● Michael Barnett is chief executive of the Auckland Chamber of Commerce

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Find out more at cpaaustralia.com.au

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

Agribusiness for investors We need to create investable businesses in the rural sector, says Graham Turley

O

ne of the difficulties facing New Zealand’s most productive and successful business sector is access to, and attracting, investor capital.

More than 25 per cent of New Zealand’s productive sector is in agribusiness yet it is widely perceived as one of the more difficult and inaccessible sectors for investment — perceptions held by retail investors, large fund managers and those overseas looking to invest in New Zealand’s agricultural success story.

Few successful agriculture-based businesses are listed on the NZX, especially when you consider how significant a contributor agriculture is to the economy — and many successful agribusinesses are co-operatives or highly successful, family-based operations and therefore not readily available to outside investors.

Even our most successful agribusinesses find it difficult to shore up capital positions and ensure access to funds for future business development.

In late 2012, an ANZ Insight Report, Greener Pastures, identified the potential for the New Zealand’s agribusiness sector to capture another $0.5 trilion — $1.3 trillion in exports by 2050. But to achieve those goals the report also identified a need for up to $340 billion in international and domestic investment to enable production growth ($210 billion) and support farm turnover ($130 billion).

Where is that investment coming from now and in the future?

As the largest financial backer of agribusiness in New Zealand, ANZ creates, identifies and supports emerging trends in accessing new capital in the sector.

A focus for our agribusiness team at ANZ is creating ‘‘investable businesses’’. We help owners address and improve areas such as productivity, governance and management of these businesses. The overall goal is to enhance returns through consistent improvements in productivity driven by research, innovation and good management.

Creating clear separation between governance, management and operational matters helps address several issues for owners and potential investors and overcomes investor concerns around transparency of revenue streams and liquidity of their investment.

That separation shows potential investors where the business is heading, how it is performing in terms of reaching its production targets, where in the business their investment is going, and how their investment is performing financially.

Seeing how well a business performs helps address the liquidity concerns some investors have about

Demand for agricultural output could grow by as much as 60 per cent by 2050. Link that demand to ongoing worldwide population growth and the opportunities for both New Zealand and Australia to become a food bowl for the wider region are significant.

Graham Turley

getting their money out of an involvement in the sector — strongly performing businesses or holdings will sell more readily when it’s time to exit.

Productivity gains are also readily recognised and this again helps investor confidence. It’s generally accepted that investments in agribusiness return about 3-7 per cent, but topperforming operations are gaining returns in high single figures and even

low double figures. Raising more businesses to that level of performance — a task for private, government and industry-based organisations — again makes the sector more attractive to new investment.

Making the sector more attractive will also help solve another problem — farm succession. Our research shows more than 70 per cent of farmers want a family member to succeed them in the business but only 47 per cent have family members working in the business and only 10 per cent of farmers have a succession plan. Farm succession is also under pressure as fewer graduates

are emerging from agri-based university courses.

Further constraining interest in investing in the agri-sector are the long-term investment horizons, volatility in earnings and fluctuating commodity prices that spook potential investors who don’t understand the sector. However, we see a long-term positive trend.

Investors and fund managers used to looking at quarterly or, at most, yearly returns need to develop an understanding that the long-term trend in commodity prices is rising.

There is always a degree of caution required in predicting a continuation

of that long-run pattern but the fundamentals are sound.

Emerging middle classes in massive markets such as China, India and Indonesia are driving a sustainable upswing in demand for protein. Our Greener Pastures report identified demand for agricultural output could grow by as much as 60 per cent by 2050. Link that demand to ongoing worldwide population growth and the opportunities for both New Zealand and Australia to become a food bowl for the wider region are significant.

So where is the investment coming from that will drive the required productivity gains in New Zealand?

Our regulations around overseas investment rank us a lowly 48th of 53 OECD countries for ease of access for foreign investment. Despite that ranking and the political anti-foreign investment rhetoric that seems to rise to prominence in election years, there is ample overseas interest in investing in our agricultural sector.

That money is coming from around the world, from investment funds and businesses that understand the prospects of long-term investment horizons matched to growing demand and New Zealand’s production and processing capabilities as well as the potential for further growth. We need more foreign investment as there is an obvious gap between national savings, and what we can finance domestically, and the levels of investment actually required in the sector.

The other rapidly growing source of capital in the sector is equity partnerships.

ANZ has access to a local and international pool of around $160 million looking for equity investment opportunities and has set up around two-thirds of existing equity partnerships in the sector.

Other operators in the field are also experiencing increasing demand with some set up to give access to retail investors and others working with large family holdings, high net worth investors and trusts to pool capital and find opportunities.

Equity partnerships bring a mix of skills and capital that supports growth and expansion and they are a rapidly emerging pathway to farm ownership. They spread the risk of investing in the sector, can release equity for succession planning and unlock the benefits of investing in the sector without having to own a farm.

There is a high level of interest in the sector and more equity coming into the market. Add that to our focus on creating those ‘‘investable businesses’’ and we see positive steps towards achieving Greener Pastures. ● Graham Turley is ANZ NZ Managing Director Commercial & Agri.

Fonterra makes play for China capital Fonterra is seeking equity participants in ‘‘Farm Co’’ — the holding company for the co-op’s expanding farm hub base in China.

An information memorandum has been circulated.

Fonterra chief financial officer Lukas Paravicini says the dairy cooperative sees a huge opportunity in China for both upstream and downstream activities. It is targeting 1 billion litres of annual milk production (though CEO Theo Spierings’ ultimate and so far unofficial target is 2 billion litres) to service growing demand for high-quality milk, which sells at a premium to Chinese-farm produced product. ‘‘We are seeking partners for that,’’

says Paravicini. ‘‘We believe we want to have strong local partners that help up to create the environment we need to be successful in the future.’’

He indicated Fonterra would seek to keep at least 51 per cent of the holding company (‘‘we want to keep management control but not much more than that — that’s our going in position’’).

For the equity participant there is value in co-investing with Fonterra which has proven capabilities in farming and processing — ‘‘typically our partners look at us as specialists in the domain’’.

For Fonterra there is also the ability to capture upside from the investment.

Our game-play is having a holding company that will hold the overall investment and that might be a couple of investors who are knowledgeable in China or the region.

Lukas Paravicini, Fonterra CEO

‘‘Our game-play is having a holding company that will hold the overall investment and that might be a couple of investors who are knowledgeable in China or the region. ‘‘That company would invest in individual hubs — the hubs could also have local specific partners.’’

Fonterra has confirmed there have earlier been talks with Cofco over forming a possible partnership at a global level.

But the ‘‘Farm Co’’ memorandum has also gone to big investment companies.

Paravicini says the process is now well under way and he is hopeful the equity partners will be confirmed this year.

Spierings has foreshadowed that Fonterra intends to appoint a Chinese advisory board, which will convene quarterly to talk about business performance, strategy and the big capital expenditures with potential big partnerships.

The chairman is likely to be Chinese; Spierings will be the deputy chairman. ‘‘At ‘Farm Co’ group level we only want to deal with financial players otherwise it gets too complicated at the governance level,’’’ he says.

At the hub level, if Fonterra gives access to upstream high quality milk, ‘‘we would always talk to them on downstream distribution strength because we are ‘business-to-consumer’.’’

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

Five strides rather than a giant leap V

We shouldn’t measure all young companies’ success against the rock stars’ yardstick.

Franceska Banga

enture capital and angel investment are a very small part of New Zealand capital markets, but increasingly important in supporting a healthy pipeline of young start-ups, some of which could become a future Fisher & Paykel Healthcare or Xero.

Last year $53 million was invested by angel investors into promising companies, the highest amount since 2006 when angel investment activity started to be measured.

If we are going to continue to build our venture capital and angel markets, there are a number of steps we need to take. Here are five: 1. Celebrate failure, persistence and moderate success too You cannot have innovation without failure. The focus we have in New Zealand on the small handful of companies that have been spectacularly successful sometimes borders on obsession. It is great to have rock star entrepreneurs in our midst — they provide affirmation that NZ has what it takes to achieve global success. But we shouldn’t measure all young companies’ success against the rock stars’ yardstick. For most companies and entrepreneurs, it is going to take eight to 10 years, if not more, to build companies of substance, and yet we seem to write them off after two or three years. And we are ruthless about failure. We are not interested to know what was learnt in the process. Entrepreneurs who’ve failed, or achieved only small scale success, but then apply their learning to build bigger and more successful companies, are critical to building a deep

Franceska Banga

Picture / Sarah Ivey

ecosystem. Angel investors understand that, which is why they focus as much on the capability of the entrepreneur as the business idea.

2. Commit for the long haul A lot has been achieved in NZ in the last 10 years, and the capability that has been built across the entire early stage capital markets is now much stronger. We must keep building on that. The temptation in NZ if something does not work straight away, is to throw it away and start again. But we end up throwing away the capability and learnings too. Improve yes, but take a longer term view

— it took the United States 40 years to build their venture and angel ecosystem. We can do it in 25 years.

This is not just about a handful of companies achieving stellar success.

It is about continuing to strengthen the ecosystem we have in place (entrepreneurs, investors, research institutes and universities, incubators and accelerators, etc) that supports numerous young companies to achieve success.

3. Pull in the big money We need new investment products which make it easier for institutional investors to get access to a

wide portfolio of innovation-led companies demonstrating good growth.

The amount of capital NZ institutional investors currently invest in private companies is dismal — about 0.6 per cent compared with between 3-5 per cent for countries like the US and Australia. The low investment rate is partly historical and understandable — there hasn’t been the right sort of investment structures, or sufficient evidence of investment track record, to make investing either easy or attractive. But that is changing — technology, and in particular software, has built a track record of success across a number of com-

panies. NZVIF is looking to create new fund products to give large institutional investors (e.g. KiwiSaver funds) access to a diverse portfolio of technology opportunities.

4. Support new migrant angel investors Create a new wealthy investor migrant category, focused on investing in angel and venture capital investment opportunities. This could sit alongside the government’s existing wealthy migrant policy and would be easy to administer.

The concept is simple and an approach that has been used elsewhere — wealthy migrants pay between $200,000 and $500,000 into a fund which would be invested into a portfolio of start-up companies alongside qualified angel investor groups. We already have the investment apparatus in place (the Seed Co-investment Fund). We already have a wealthy migrant policy. It is a matter of joining the two together. This would have many direct and indirect benefits for NZ companies, in respect of building offshore networks.

5. Asia Pacific Innovation Forum NZ is perfectly positioned to lead an Asia Pacific Innovation and Technology forum, which invites the best and brightest young entrepreneurs from around the Asia Pacific Region to come together in NZ and present their new business ideas, to an international audience of technology investors. No other country is as well placed as NZ to lead an ambitious event like this. ● Franceska Banga is Chief Executive of the New Zealand Venture Investment Fund

We provide clear direction In a complex and changing world we are perfectly positioned to help you navigate the way forward.

We deliver world class and specialist capital markets advice, decisively.

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

Not enough big local fish for savings pool The absence of domestic investment opportunities is seeing increasing amounts of KiwiSaver fund money finding its way overseas, reports Alexander Speirs

S

ince its inception in 2007, New Zealanders have subscribed to the Government’s KiwiSaver retirement scheme in numbers far surpassing initial projections. By the end of March, 2.3 million Kiwis were actively involved in the scheme — dwarfing the 700,000 Treasury expected to have enrolled at this point.

The substantial number of members has seen the pool of capital in KiwiSaver expand to $18 billion at present, set to grow to $80 billion by 2026 and $146 billion in 2036. The speed with which the capital has accumulated is promising, and the quantity significant by New Zealand standards — but the absence of domestic investment opportunities is seeing increasing amounts of that money finding its way overseas.

New Zealand stock markets don’t have the capacity or exposure required by large fund managers to handle the investment now or into the future. Despite the significance of the NZX growing from 32 to 38 per cent of GDP, it remains small compared to the overall size of the economy. ‘‘We don’t have as good a representation of the economy on our sharemarket as a lot of other economies do,’’ says Anthony Quirk, managing director at Milford Asset Management. ‘‘There remain large parts of our economy which aren’t really represented on there at all.’’

Representation of the financial sector is the most glaring omission, with none of New Zealand’s major banks listed, as in Australia or other major markets. Beyond that however, the number of new companies transitioning from private to listed status remains woefully insufficient. ‘‘The birthrate of companies who are coming on to the stock exchange has been too low historically and it remains an issue today. Be it early stage growth companies or established businesses, we’re not seeing enough companies listed.’’

The dearth of domestic opportunities in which to place the growing wall of KiwiSaver capital has seen increasing amounts channelled offshore. ‘‘Investors will always be looking for a balanced portfolio and will take advantage of offshore opportunities. The New Zealand sharemarket doesn’t have comprehensive enough coverage and exposure to all sectors, it’s imperative that some funds are divested offshore for effective risk management,’’ says Jim McElwain, Executive Director of the New Zealand Institute of Financial Professionals. ‘‘We shouldn’t be xenophobic and say that all investment should be in New Zealand; overseas investment will always have an important part to play in a balanced approach to KiwiSaver. The more that we can see invested in this country the better though, because it’s a positive for everyone — it’s a win for the KiwiSaver investor because they’re seeing positive returns, but it’s also a productive investment for the New Zealand economy.’’

Simon O’Grady, Chief Investment Officer at Kiwibank notes that though productively using money in New Zealand is desirable, producing the best outcomes for investor capital had to remain top priority. ‘‘Fund managers responsible for the invested funds have a fiduciary duty to their investors. We constantly

have to look at the expected risks and returns, then ask where we are going to get the best risk adjusted returns from and increasingly that looks like it’s offshore. ‘‘As fund managers we don’t really have a choice. There’s a quickly growing pot of money and if the nation can’t create opportunities domestically to invest that are going to return risk-adjusted rates high enough to justify it, the money will go offshore’’.

The challenge for New Zealand businesses across the board is to create opportunities for productive investment at home, while producing sufficient rates of return to stack up with international prospects. ‘‘We foresee there being a supply side response where private or partially private companies will take the opportunity to become listed and open up new opportunities for investment which is very good for KiwiSaver. ‘‘Nationally it doesn’t create any new value though, all it does is transfer money out of the KiwiSaver pot and into private hands. Then you have the same issue — where are they going to put that money — and realistically, it’s likely to end up overseas somewhere down the line. ‘‘We need to focus on how we as a nation create globally significant and competitive industries that can really foot it on the international stage, rather than just recycle money between public and private hands,’’ says O’Grady. ‘‘It’s an issue now and it’s an issue into the future,’’ adds Quirk. ‘‘One of the things you would hope it would do is provide more capital for growth in New Zealand where it can be productively utilised. It’s important though that if you’re investing in New Zealand, you don’t just do it just for the sake of it.’’

If New Zealand is going to attract its fair share of the KiwiSaver investment pot, creating new opportunities

Kiwisaver enrolment Year

Members

2008 2009 2010 2011 2012 2013

856,487 1,338,065 1,733,152 2,056,599 2,286,833 2,468,435

which can transition to scalable and listable businesses is imperative. ‘‘We have one of the highest rates of entrepreneurship in the world in terms of the number of companies started, but a real problem taking those fledgling companies through to critical mass,’’ says McElwain. ‘‘We need to take these smart Kiwi companies from $5 million-$10 million annual sales through to the $50 million-$100 million level. At that level they develop critical mass and become self-sufficient, helping to address the gap in the middle between our small businesses and our large-cap companies.’’

Headlined by Xero, New Zealand has seen the birth of some highprofile technology companies in recent years which have developed from small businesses through to NZX main board listings.

Floats of businesses like Wynyard Group and Snakk Media have broken the historic perception of New Zealand markets providing low growth and high-dividend yield. ‘‘The abundance of high-end technology listings we’ve seen in New Zealand of late does suggest that there is an appetite for high-risk, high-growth opportunities,’’ says McElwain. ‘‘We’ve seen new options for businesses to raise finance and become more mature investments of late. With the opportunity to partake in peer-to-peer lending and crowd funding for example, we’re seeing new ways in which capital can start to accumulate and growth can be accelerated.’’

The introduction of a proposed new growth market on the NZX is one way small to medium-sized businesses may be able to secure growth capital in the future, while instilling the requisite discipline and processes for a potential main board listing down the line.

Aimed at businesses with a market cap of $10 million-$100 million, the new market will support the listing process for more types of businesses than it has been accessible to in the past. ‘‘I think to start with any change we see will be around the margins, but I certainly hope over time you’ll get more companies coming to list on the share market — both smaller growth companies and also larger companies which have opted to stay unlisted in the past,’’ says McElwain. ‘‘We’ve had seed experts and angels in the past, but hopefully the NZX new market can help fill the remaining void. There will be a clearer transition to raising finance as a small business through to raising capital as a large business. That’s very important because too often in the past you see innovative Kiwi companies getting to the $5 million-$10 million sales mark then being sold offshore’’.

David Wilson, Investment Strategist for New Zealand Funds Management however is not so impressed with the new market as a realistic option to place KiwiSaver funds in the short term. ‘‘I think what we’ll see is more issues, but the problem with the new market will be a question of liquidity.

We’ve seen new markets try to start before in New Zealand, but we feel that that market is probably too illiquid for us to invest KiwiSaver funds in, from what we’ve seen so far.’’

If more investment is to remain onshore, Wilson would like to see further incentives offered for doing so. ‘‘The only real bias we have toward buying in New Zealand at present is the tax advantage through imputation credits,’’ he explains.

One policy response O’Grady thinks can be effective is creating an easier framework in which the incubation of local fund managers can be improved and better ex-pat talent attracted home. ‘‘We don’t have a strong global investment capability here in New Zealand.’’

Improving the calibre of talent within New Zealand to take concepts through their growth stages from start-up to international business would create new wealth locally, while also providing productive uses for the expanding KiwiSaver pot.

McElwain agrees: ‘‘There’s a whole bunch of people whose talents and expertise could be harnessed and brought on as mentors, directors, investors. You need smart money — that’s money that’s not just finance but access to skills, expertise and knowledge — to take Kiwi companies and their innovative products into the foreign marketplace.’’ ‘‘Its all a step in the right direction,’’ adds O’Grady. ‘‘At the end of the day we’ve got to create some economic value adding activity which generates value beyond just facilitation of capital exchange and capital raising. ‘‘It’s not so much about the engine of capital markets and the flow of money from those who have it to those who need it, it’s about creating the actual opportunities in the first place.’’

What the fund managers say Anthony Quirk

I think the front-end of KiwiSaver is working well, the capital is accumulating and if it ain’t broke, don’t fix it. The back-end of KiwiSaver however needs some serious attention — addressing what happens when people retire and the decumulation period begins as they start to draw on their savings.

If the government is assuming people have retirement savings but in reality they’ve blown it all, it’s not a good thing because they’re going to go back to the state and rely on government superannuation.

There’s a real government interest in making sure those funds are used wisely. One solution could be to have a mix where half of the money for example may have to be kept in a long-term fund, while the other half can be drawn on. The government can play its part by actually issuing some longer-term debt which is a key part of developing some of the sorts of products which could work in this space. We really need a political agreement or long-standing accord on this issue.

Simon O’Grady

Anecdotally I’ve noticed that there is a strong ex-pat community offshore with interest in coming home, who are skilled across a range of investment areas yet find it quite difficult to set up and incubate investment funds.

We’ve not proved adept at supporting the creation of an offshore focused funds management industry locally. ‘‘We have a wealth of global talent offshore, competitive advantages in terms of Asia Pacific connections and being a good place to operate and set up fund management businesses. Bringing it all together has been a riddle we haven’t been able to crack yet. There’s no one magic policy bullet. It’s about implementing a range of changes which will have an effect incrementally. I’d like to see changes around making it easier for domestic money to be invested offshore, which requires improvements around tax transparency and compatibility to ensure we’re not continuing to create tax barriers.

David Wilson

What we are looking for is good returns. There is nothing in our KiwiSaver mandate saying we would prefer domestic investments over international investments. In that sense we feel our universe is truly global and unless there is a reason to invest domestically — generating a better return — then we see no real reason to do it. We are only a very small part of global markets and there are some very good opportunities overseas for investment. The New Zealand equity market is very narrowly focused and isn’t well represented by a lot of sectors, as overseas. Our market size has not grown for several years. It’s a very small market and it’s susceptible to one-off shocks, part of the KiwiSaver programme is to diversify away from that.

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Capital Markets

Can compulsory KiwiSaver be a game changer?

Peter Neilson

T

oday’s KiwiSaver balances barely reach $20 billion, whereas the NZX is worth about $90 billion and our love affair with residential real estate puts our investments there at more than $600 billion.

After this year’s general election the growth trend for KiwiSaver is very likely to accelerate. Labour has confirmed its intention to make KiwiSaver universal (compulsory) for employees and steadily increase contributions to 9 per cent from the currently typical level of 6 per cent (3 per cent from the KiwiSaver and 3 per cent from the employer).

Seventy per cent of New Zealanders back making KiwiSaver compulsory for employees (Horizon Research, October 2013) with National’s voters being even keener than Labour’s. John Key won’t want Labour stealing a march on him, so a pragmatic counterpunch on the election trail is possible.

Had the 1974 Kirk compulsory New Zealand Super Scheme continued we would be looking at a fund worth $278 billion, split 50-50 with $139 billion on the NZX, the New Zealand Stock Exchange and $139 billion in New Zealand bonds.

The Financial Services Council has outlined how we could lift retirement incomes so most New Zealand employees retire on a comfortable income. Most New Zealanders say they need about twice the amount of NZ

Most New Zealanders say they need about twice NZ Super to have a comfortable income.

Peter Neilson

Super to have a comfortable income.

The current level of NZ Super for a couple is $564 after tax or $282 each.

To be comfortable, most couples say they would need almost $900 a week.

On the current policy settings a member of KiwiSaver on the minimum wage of $28,200 would need to save 13.1 per cent of their pre-tax income to achieve a comfortable retirement if they have defaulted into a conservative fund. That is just not affordable for most low-to-middle income earners.

The Financial Services Council’s

advice, based on nearly $1 million investment in research and polling is: ● Keep NZ Super as it is in terms of the level, with the link to average wages and with no income or asset tests. Any reduction in the level of NZ Super makes it much harder to save to achieve a comfortable retirement. ● Move default KiwiSavers from conservative to balanced funds to enable those on the average wage to get another $300,000 in their retirement nest egg over 40 years. ● Look at offsetting the additional risks by having KiwiSavers pay for capital guarantees to ensure they are protected from a sharemarket meltdown such as in 1987 or 2008 close to buying their first home or when close to retirement. ● Level the tax playing field for KiwiSavers so they do not face effective tax rates of more than 50 per cent compared with people investing in rental housing who pay much lower effective tax rates. If we do this, someone on the average wage can fund a comfortable retirement by saving $8 a day along with their employer in KiwiSaver, rather than the $13.50 they would currently need.

Our research finds only 6 per cent are currently contributing 10 per cent or more to their KiwiSaver accounts and compulsion has 70 per cent voter support. Compulsory KiwiSaver and steadily stepping up contributions to 9 per cent split with their employer (4.5 per cent-4.5 per cent) is likely to be a game-changer for the KiwiSaver and funds management industry.

New Zealand has not had a current account surplus for 40 years, even with the best terms of trade in a generation we are currently enjoying.

For New Zealand the deepening of capital markets from expanding KiwiSaver will also help take some pressure off the exchange rate as we are less dependent on foreign capital.

Foreign investors want to be paid more to overcome their natural home country investment bias. It should also boost the early equity capital available for fast-growing New Zealand companies to help increase our employment levels and incomes.

An Infometrics study commissioned by the FSC finds a compulsory KiwiSaver, with new members and their employers contributing a combined 1 per cent of income, rising to 10 per cent by 2024, would result in more than $700 billion in funds under management by 2066. This would inject an extra $52 billion into the stock market, compared to carrying on with the current level of KiwiSaver contributions and coverage.

This election looks like being more important than most for the growth and deepening of capital markets.

Compulsory KiwiSaver could be the game-changer. ● Peter Neilson, CEO of the Financial Services Council which represents KiwiSaver providers and the personal risk insurance market (life and income protection insurance). He was Minister of Revenue and Associate Minister of Finance and SOEs in the 1984 to 1990 Labour Government.

Life cycle approach Jim McElwain

The default funds which have been set up are a very low risk option, which is fine for a certain demographic but it doesn’t really make sense for younger people who potentially have a 20 or 30-year investment horizon.’’

Statistics suggest that just over 40 per cent of investments are in growth assets for KiwiSaver, with the balance made up of bonds, cash and property — an inherently conservative mix despite the average contributing member being only 35. ‘‘Part of this is caused by the innate conservatism of many New Zealanders who don’t necessarily trust financial markets, but hopefully that will change over time.

The Institue of Financial Professionals submitted a proposal for a lifecycle approach to investment over the current scheme. It would see investment risk and return matched with the investment horizon and lifecycle of the investor. A life-cycle fund offers a greater probability of increased asset growth rather than a conservative fund, better aligns participants’ age-based risk profiles with their asset exposure than a single strategy does, and offers a mitigation strategy against market shocks.

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Comment & Debate

Capital Markets

Are our capital markets getting better?

The chairman of the Government’s Capital Markets Development Task Force, Rob Cameron, gives his verdict

I

n 2009, not very long after the onset of Global Financial Crisis, the Capital Markets Development Taskforce (CMDT) delivered their report to Government with a diagnosis of, and recommendations to improve, New Zealand’s capital markets.

The taskforce’s diagnosis highlighted deficiencies in our capital markets. They can be summarised as follows. Our markets frequently produced poor results for investors, including low quality information, uneven quality of financial advice, uncertain levels of investor protection and a limited range of product choices.

As an ‘‘engine of growth’’ they exhibited shortcomings — the public equity market (NZX) lacked size, depth and breadth relative to the size of the economy, the debt markets offered a limited range of quality securities, the derivatives market was failing to provide an adequate range of risk management products, fast growth companies faced significant funding gaps, and private capital markets were not well linked to our public markets.

The regulatory settings for our markets were inadequate, reflecting a lack of clear objectives, a number of agencies with overlapping roles, shortcomings in enforcement and uneven application of rules throughout capital markets. Tax and regulatory policy settings distorted saving and investment choices and constrained supply of talent and capability to our capital markets.

Almost five years on, it is timely to examine the Government’s response to the taskforce report, identify what has changed and assess how well our capital markets are performing.

The Government’s response has been extremely positive.

Changes have produced significant improvements in our capital markets — a healthier environment for retail investors, markets which function more effectively.

It made capital markets one of the six focus areas in its Business Growth Agenda, introduced tax changes in the 2010 budget (recommended by the taskforce and the Tax Working Group) and set about implementing the 60 recommendations of the Capital Markets Development Taskforce Report.

They include establishing the Financial Markets Authority (FMA), licensing Trustees and Capital Supervisors, enacting important changes to the regulatory regime for financial advisors, facilitating the development of the Local Government Funding Agency (LGFA), improving support for innovative and early stage companies (including establishing Callaghan Innovation), developing and launching the ‘‘mixed ownership model’’ (MOM) for selected large SOEs, legislation to facilitate Fonterra’s capital structure proposal, enabling NZX to develop a dairy futures market and introducing the game changing(FMC) Act. The Financial Markets Conduct Act: ● Sets out standards of conduct expected for financial market participants ● Removes unnecessary compliance burdens on capital raising for small, private and listed companies ● Promotes innovation by provid-

ing for crowd-funding and lower cost public markets ● Decriminalises conduct except where there is recklessness involved (providing instead for pecuniary penalties and a range of protective tools) ● Ensures that activities within the regulatory net are properly regulated through disclosure ● Establishes governance requirements for managed funds and licensing of fund managers and enables more user-friendly information to be made available to investors (through the use of an Investment Statement in public offerings).

The past five years have therefore been a period of huge change for New Zealand capital markets.

Equity capital markets developments include: the introduction of a new clearing system by NZX; the IPO of the Fonterra Shareholders fund and launch of the Trading Among Farmers market; the IPOs of Mighty River Power, Meridian and Genesis as part of the Government’s MOM programme; and the emergence of an expansion capital market through the facilitation of public listing for young, fast growth companies.

Debt capital markets developments include: the near disappearance of the finance company sector and the development of a new regulatory regime for non-bank deposit takers; a more active Debt Management Office and Government stock market; the resurrection of Inflation Indexed bonds; the re-emergence of the Kauri bond market; and the establishment and rapid growth of the LGFA (with new bond issuance of around $2.5 billion in its first 18 months of operation).

These changes have produced significant improvements in our capital markets — a healthier environment for retail investors, markets which function more effectively as an en-

gine of growth, significant improvements in the regulatory architecture and more sensible taxation policies from the perspective of savers, investors and the companies which use capital.

The period since the beginning of 2013, in particular, has seen major gains.

Around $7 billion of new capital was listed on the NZX and eleven companies have become publicly listed (the largest number of public company ‘‘births’’ for more than a decade).

The total number of trades has jumped by more than 30 per cent, the number of new investor accounts on

Tasks at hand The 60 recommendations of the Capital Markets Development Taskforce Report include: ● Establishing the Financial Markets Authority (FMA), licensing Trustees and Capital Supervisors ● Enacting important changes to the regulatory regime for financial advisors, facilitating the development of the Local Government Funding Agency (LGFA) ● Improving support for innovative and early stage companies (including establishing Callaghan Innovation) ● Developing and launching the ‘‘mixed ownership model’’ (MOM) for selected large SOEs ● Legislation to facilitate Fonterra’s capital structure proposal ● Enabling NZX to develop a dairy futures market ● Introducing the game-changing Financial Markets Conduct (FMC) Act.

the NZX has increased by around 25 per cent and the market capitalisation of NZX listed companies has grown to $87.4 billion, a 24 per cent year on year increase.

The Government’s MOM programme has been an important contributor to these gains. It has added significantly to the size and breadth of our equity market, increased the number of retail investors participating in the market (it is estimated the programme has been responsible for 111,000 new shareholder numbers), helped provide retail investors with a better range of good quality equity product choices and has stimulated international interest in our market.

Many local authorities will be examining the MOM programme to see whether and how its principles and approach might be applied to their own business assets and activities.

The other major contributor has been the emergence of an expansion capital market through listings for young fast growth companies. Xero was an early pioneer but it has been followed by a number of others including Pacific Edge Biotech, SLI Systems, Wynyard and GeoOp. This is playing a major role in closing the funding gap for smaller, fast growth companies. The NZX is now proposing to launch a new market better tailored for these companies with modified rules, and measures designed to improve liquidity.

There are further improvements to make to New Zealand’s capital markets.

But the changes outlined above are producing markets that are working better as a system.

They are generating more liquidity, higher quality information flows, better capital market disciplines and are attracting more capital and capability.

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Comment & Debate

Capital Markets

Three ‘I’s key to Labour plan Labour’s Economic Upgrade focuses on investment, innovation and industry, says David Parker

N

ew Zealand is a trading nation. We are a country of innovators, with good businesses and products. Our workforce is well-educated and hardworking. We have a wonderful resource base. Yet we have not posted an external surplus for 40 years, and have interest rates which are structurally higher than our competitors pay. Even this year, on the back of wonderful terms of trade, we do not export enough to pay for our imports and interest.

Despite low general inflation, Auckland house prices are up 40 per cent, while exports have narrowed towards over-reliance on dairy.

Plainly current settings need to change.

Labour has a 98-year history of innovative, new ideas to drive growth to sustain improved standards of living and higher wages. Our policies link to reduce interest rates, and help remedy the overvaluation of our currency, which is related. This is fundamental for our exporters and their investment plans.

Our broadening of the objective of the Reserve Bank will align its efforts with our export sector, without the RB losing its independence or undermining its control of inflation.

It’s part of the grand tradition of bold and original thinking where Labour often leads the world.

A part of Labour’s plan which has captured the headlines is the variable savings rate mechanism ‘‘VSR’’. We want to give the Reserve Bank this new tool as a means of dampening

down inflation.

A dollar less consumption via more savings is just as effective in controlling inflation as an extra dollar paid in interest. The Australians proved this as they transitioned into their scheme. While interest paid is lost to the payer forever, often to overseas, savings belong to the saver.

The VSR is innovative, albeit less important than the move to universal KiwiSaver.

In some ways the VSR has a more direct link to consumption than changes to interest rates via the Official Cash Rate (OCR). Fixed interest loans mute the effect of the OCR, as do changes to trading bank

margins. The VSR puts money into savings, whereas some of the higher interest payments under the OCR mechanism are spent by those who receive the higher interest. There is no perfect mechanism.

Because total debt is higher than total earnings, it is unlikely the Reserve Bank will be able to rely upon the VSR alone, but every bit done by savings reduces the need to push up interest rates via the OCR. Other policies like a capital gains tax also help avoid inflationary pressures and help keep interest rates low.

This is just part of Labour’s vision for the economy — what we call New Zealand’s Economic Upgrade, which

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focuses on the three ‘‘I’’s — Investment, Innovation and Industry.

The current system has led to high interest rates by international standards, higher mortgage payments, and an over-valued currency, which forces our exporters out of business and sees our firms undercut at home.

Labour’s upgrade will address external deficit of over $10 billion by making sure we export more overseas to pay our way in the world.

The investment pillar of the upgrade requires support for capital markets.

Capital markets play a crucial role in growth and improvements in the New Zealand economy.

Since Norman Kirk’s superannuation fund was thrown on the scrap heap by Robert Muldoon, New Zealand has struggled with domestic savings. In contrast Australia has $1.5 trillion in their universal workplace savings. We are 25 years behind and playing catch-up. The Australian scheme is why they own their own banks, plus most of ours, and so many of our other businesses.

That’s why Labour will make KiwiSaver universal. It will significantly expand our domestic savings and create a large pool of local investment.

Universal KiwiSaver is not enough on its own. Additional steps are needed to ensure the increased investment goes where it’s needed — into productive, innovative businesses. That’s where our pro-growth tax reforms come in.

Labour will introduce a capital

gains tax of 15 per cent, excluding the family home and long-term small businesses. That will encourage investment away from our overheated property market and into the productive sector. Building affordable houses under our Kiwibuild policy will also dampen house price and rent inflation.

Labour will use tax tools to encourage innovation. Labour has already committed to rolling out accelerated depreciation tax deferrals for the wood processing industry and advanced manufacturing to encourage more investment in new technology.

We plan to introduce accelerated depreciation across the economy in the long term, but can only do that over time as fiscal conditions allow.

That’s why we are starting with industries where we think it will bring the most benefits.

However our research and development tax credits will apply across the economy. That will encourage businesses to invest to develop new products and markets, crucial to an innovative and advanced economy.

Labour’s economic plans have met with support across the spectrum.

The current settings are keeping investment and savings low, hurting our net international liabilities and reducing productivity. The economic upgrade is exactly what New Zealand needs to be a wealthier nation with better jobs that pay higher wages. ● David Parker is Labour’s deputy leader and finance spokesperson

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Comment & Debate

Capital Markets

Five myths about foreign investment MYTH 1: Foreign investment means loss of control Parliament remains the supreme lawmaking body, inwards foreign investment must comply with New Zealand laws, and foreigners don’t get to vote. Land use and business activity is extensively regulated in New Zealand, for overseas and local investors alike. In 2004, Treasury identified seven statutes that regulated land use in New Zealand and nine more that regulated corporate governance and business behaviour. Of course, Parliament exercises its power to enter into international agreements, including trade and investment agreements that commit it to abiding by the terms of those agreements. But these are the actions of a sovereign state seeking to make it easier for its citizens to trade and invest.

MYTH 2: Selling assets to foreigners means losing an income

Foreign Investment is set to once again be a political football at the upcoming election — Bryce Wilkinson punctures the myths stream forever — sheer madness This concern ignores the vendor’s ability to invest the proceeds elsewhere. The consideration received by the vendor must adequately compensate for the loss of the earnings stream; otherwise the transaction would not occur. For example, it makes sense to sell a house, to a foreigner or anyone else, when it no longer adequately suits one’s purpose. One can use the proceeds to buy a more suitable house. The same is true for investments in business assets.

profits from selling to the rest of the world — we will miss out.

It would be uncommercial for a New Zealand vendor to sell such assets other than through a competitive process. A competitive sale process confronts potential bidders with the value others see in the asset being sold, greatly reducing the likelihood of the asset being sold too cheaply.

Indeed, research indicates it is more likely that the winning bidder will turn out to have paid too much rather than too little — the so-called winner’s curse.

competing firms.

Foreign investment has been a path to prosperity for many countries, including China today. It has played an important role in New Zealand’s economic development, without wrecking industries. Despite open capital markets, New Zealand’s goods and services exports have exceeded imports for five of the past 20 years.

Foreign direct investment in Singapore is seven times higher per capita than in New Zealand and Singapore’s industries remain very competitive.

MYTH 3: Allowing inwards foreign investment will see foreign firms buy up our innovative ideas, patents and products and reap the

MYTH 4: Incoming foreign investment drives up the exchange rate, wrecking our export industries and our import-

MYTH 5: The more houses foreigners buy the fewer there will be for NZers to live in.

This fear is misplaced on two counts.

● Bryce Wilkinson is Senior Research Fellow at The New Zealand Initiative.

First, more houses are being built each year, and the industry is capable of building many more houses a year if demand materialises. Second, foreigners who buy homes and rent them out are not depriving New Zealanders of the chance to live in those homes. Surges in immigration can put pressure on house prices in the short term, but this is not a foreign investment issue, it it is an immigration issue.

The next generation of moves Financial reforms have given us much to celebrate but we need to push forward, writes David Skilling

O

ver the past 15 years substantial positive change has occurred in New Zealand’s capital markets.

Notable changes include the establishment of the New Zealand Superannuation Fund, the introduction of KiwiSaver, and tax reforms to encourage personal savings.

There is now much greater recognition of the centrality of New Zealand’s capital markets to its economic performance. At an individual level, these policy changes are leading to the development of different attitudes towards saving and investing.

There is much to celebrate. And it is an illustration of the difference that sustained attention to the state of the New Zealand financial sector can make. This is reassuring, because ongoing sustained attention is now required to push forward the next generation of action with respect to capital markets. This next generation of action is needed to address a series of risks and challenges, as well as to capture emerging economic opportunities.

First, the challenges. Despite the improvements over the past decade, substantial risks and financial exposures remain. New Zealand’s current account deficit remains high at around 3.5 per cent of gross domestic product (GDP), while most other small advanced economies run surpluses, and our high level of external liabilities is an outlier.

New Zealand’s capital markets remain small relative to other small advanced economies (with a market capitalisation of 47 per cent of GDP, relative to 150 per cent in Singapore, 71 per cent in Denmark, and 64 per cent in Finland). Our household savings rates and household debt levels remain at worrying levels. Concerns about bubbles are overblown, but these outcomes do combine to generate substantial exposures for a small, open economy like New Zealand.

In this context, we should take seriously the risks associated with the global financial system. The search for yield in a very low interest rate environment over the past several years has distorted a range of asset prices around the world (equities, bonds, property prices, among others). The International Monetary Fund’s recent Financial Stability Report lists a wide range of risks associated with the ongoing process of transition to more normal conditions: for example, the cross-

For every high profile success story like Xero, there are also stories of companies that find it difficult to scale up from a New Zealand base with New Zealand capital. And as the population and economy grows, additional capital will be required to enable New Zealand to invest in the infrastructure needed to support this growth.

These are of course long-standing issues. But there is a need now to move from problem diagnosis to meaningful action.

Actions that should be on the agenda to ensure that capital is able to be deployed to productive ends include: ongoing efforts to boost government and personal savings; more active government balance sheet management, including thinking about how the balance sheets of

To build resilience against these risks, New Zealand’s ongoing focus on fiscal discipline and reducing public debt over time is vital.

border spill-overs from the ending of quantitative easing (QE) dealing with increased leverage in many emerging markets (including China), and the increased potential for risks to radiate across the international system.

The potential for global financial turbulence is a significant exposure for New Zealand given the lower resilience associated with small economies, together with the scale of New Zealand’s external liability position. Indeed, the recent IMF report on New Zealand’s financial stability noted the risks to New Zealand in this regard.

For the moment, New Zealand’s healthy fiscal position and strong

growth prospects reduce these risks, but history shows that investor sentiment on small countries can change quickly.

To build resilience against these risks, New Zealand’s ongoing focus on fiscal discipline and reducing public debt over time is vital. Without fiscal discipline, it is unlikely that we would be in the good shape we are (it is instructive that small countries tend to be fiscally conservatives, and have emphasised fiscal consolidation over the past several years). And policy efforts to encourage household savings should be continued.

Second, action is also required to position New Zealand to capture

emerging opportunities. New Zealand firms have real economic strengths in sectors including agriculture, tourism and the weightless economy.

These firms require capital in order to expand at scale, and to take advantage of the substantial market opportunities in Asia and elsewhere.

Without access to risk capital, New Zealand firms will lose these opportunities to competitors. And to the extent that it is New Zealand capital that can be deployed against these opportunities, New Zealand will capture a larger share of the value.

Further progress is required in improving the scale and functioning of our capital markets.

government-owned financial institutions could best be used; more aggressive efforts to attract FDI into New Zealand to strengthen the productive base of the economy; providing vehicles that give New Zealand investors a better ability to deploy capital in productive sectors from agriculture to venture capital; and progressing a capital gains tax on property investment.

New Zealand is in an economic sweet spot at the moment.

One important driver of this is the state of the international environment, such as strong demand from China and positive foreign investor sentiment. But over the next decade we will be moving into a more complex and challenging international environment, for which we need to prepare ourselves.

Further strengthening our capital markets and national saving performance is vital to building economic resilience and sustaining our economic performance. We should fix the roof while the sun is shining.

It is not a time for complacency. ● Dr David Skilling is director at Landfall Strategy Group, a Singaporebased strategic advisory firm, and former Chief Executive at The New Zealand Institute [www.landfallstrategy.com; on twitter @dskilling]

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

Comment & Debate

Capital Markets

Misguided move on Reserve Bank If Labour hopes to boost savings, other channels will be more effective, says Sean Keane

T

he Labour Party wants to expand the Reserve Bank’s mandate well beyond traditional areas of monetary policy and financial stability, requiring it to focus on the achievement of a ‘‘positive national external balance’’.

The Bank will be encouraged to use existing tools differently. It will be given an additional tool — a variable savings rate (VSR) — which it can use to force savings rates higher instead of hiking interest rates.

Labour promises ‘‘lower interest rates, a more competitive dollar and better jobs with higher wages’’. The language employed in Labour’s ‘‘Reserve Bank Upgrade’’ suggests the party has uncovered the long-sought for elixir of economic life, guaranteeing fiscal and economic nirvana for all New Zealanders. Finance spokesman David Parker will surely be in the running for prizes from Nobel and the UN if this elusive prescription for economic wealth and wellbeing proves effective.

Introducing such a policy in New Zealand is not in itself a bad idea, but the outcomes may prove disappointing. Thought needs to be given to how this might impact upon other parts of the financial system, and whether it is appropriate to expand the role we ask our central bankers to undertake. Risking the policy premium and the potential for unintended consequences Labour’s policy will force Reserve Bank Governor Graeme Wheeler to attempt the near-impossible — balancing the primacy of price stability with additional responsibility for creating

Finance spokesman David Parker will surely be in the running for prizes from the Nobel Committee, and the United Nations if this elusive prescription for economic wealth and well being proves to be effective.

Sean Keane

conditions that lead to external surpluses. Such conditions will inevitably require the bank to pursue policies that encourage a lower New Zealand dollar though a strong currency has at times been an essential policy tool.

Foreign investors have granted New Zealand a hard-earned policy premium in recent years thanks to the Reserve Bank of New Zealand (RBNZ) Act and the Fiscal Responsibility Act. These laws enshrine balanced budgets and inflation control at the heart of our financial system. Tampering with the RBNZ Act will undoubtedly trigger some loss of foreign investor confidence, especially given the implicit downgrading of the bank’s inflation commitment.

The lack of domestic savings is a fiscal issue that can be influenced over

the longer term by government policies, and most importantly by the structure of the taxation system. If the Labour Party’s objective is to boost savings, addressing it through other channels will be more effective than muddying the clear waters in which the bank currently operates.

Compulsory KiwiSaver increases may cause unintended consequences and savings substitution rather than a net increase in aggregate savings. Some KiwiSaver funds will simply be pulled from bank deposits, weakening the liquidity position of the banks, and forcing them to chase more expensive offshore term funding. Worse still might be a scenario in which banks were forced into more competitive bidding for funding to stop leakage into KiwiSaver.

The new policy could amplify economic imbalances rather than alleviating them. Moves to force Kiwi citizens to save more will affect a much larger group than those impacted by OCR increases. Everyone in the workforce will have to increase savings, including those least able to set aside the cash to do so.

The Australian situation tells us there are no easy wins to be had here.

There is no guarantee that changing the RBNZ Act will ‘‘fix’’ our external deficit position. Australia’s Superannuation savings are vastly larger than NZ’s, yet Australia continues to run external deficits and its savings rates have historically not been much better than New Zealand’s. The Australian dollar also remains strong even though Australian interest rates are below those in New Zealand.

There is no clear evidence that compulsory savings schemes reduce external deficits. Macroeconomic policy is much more powerful on spending behaviour when it involves real changes in financial costs. Interest rate and tax increases directly reduce real disposable incomes, and alter behaviours via reduced consumption.

Changes in compulsory savings rates don’t work the same way. They impact upon available liquidity, but they don’t necessarily change behaviours as people don’t perceive any real change in their net economic wealth.

In Australia those paying into Superannuation funds have been able to maintain consumption by unlocking credit elsewhere. They have saved for

later, but have continued to spend today in the knowledge they have funds to pay back debt in future.

Conclusion: A well-meaning but misguided policy prescription Labour is to be commended for making a very real attempt to think outside the NZ box and break the interest rate/foreign currency link that has bedevilled policymakers for the past 15 years. Its policy release reaffirms the bank’s independence, and retention of the inflation target.

This will be welcomed by global markets. The additional policy proposals create a useful framework for debate, but place too much responsibility on the bank for problems that belong elsewhere.

Labour’s policies assume the power to rectify NZ’s structural economic imbalances rests with the Reserve Bank. Though it’s a commonly held view that central banks have the power to move mountains, they don’t.

Their ability to influence and change economic structures and long-term policy is severely limited. External imbalances cannot be rectified by changes in monetary policy.

Rebalancing requires changes to longterm economic policy settings.

If the Labour Party’s objective is to boost savings and reduce external imbalances, then its very reasonable proposals for reform of capital gains taxes in the property sector are likely to be far more significant in achieving those goals. ● Sean Keane is the founder and Managing Director of Triple T Consulting.

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nzherald.co.nz | The New Zealand Herald | Thursday, May 8, 2014

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