Shares going sideways, mounting pressure from shareholders; where next for the NZX?

Wednesday, 5 June 2019

The loss of domestic control of such a pillar of New Zealand Inc like the NZX would be a blow to the country's economic psyche. But it would be tough to justify government intervention if a takeover offer did emerge.

OPINION: Seventy two. That's how many new companies — not debt securities, not exchange traded funds — have listed on Australia's stock exchange in the first 10 months of its current fiscal year. By the time the year closes at the end of this month the New Zealand exchange, the NZX, will have added just one new listing over the same period.

Cannasouth aims to raise roughly $10 million and begin trading in a couple of weeks. They're the exception that proves a very dismal rule. It's not that New Zealand companies aren't growing-up and joining public markets. Some of them are, they're just not doing it in New Zealand.

In the last year or so, the ASX has attracted at least a dozen New Zealand companies. The hardest blow was in early 2018 when tech darling Xero dropped its NZX listing altogether in favour of Australia.

* NZX swallows bitter pill in Xero delisting

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The hardest blow was in early 2018 when tech darling Xero, founded by Rod Drury, dropped its NZX listing altogether in favour of Australia.

* NZX plans to scrap junior equity exchanges NXT and NZAX

* Shrinking NZ sharemarket not in crisis - 'but it's not far off'**

There are many reasons for the trend. The rise of private equity players both in New Zealand and abroad has produced a powerful shift over the last decade. Traditionally, when the founders and early shareholders in private companies needed liquidity to sell their shares, and the company needed deeper pockets to grow, a public listing made sense.

Traditionally, when the founders and early shareholders in private companies needed liquidity to sell their shares, and the company needed deeper pockets to grow, a public listing made sense.

More recently, private equity buyers have also provided that later stage option. Partly because they have 'significant levels of capital to deploy,' and partly because of 'access to debt funding that is very cheap at the moment,' says Jeremy Williamson, director of investment banking at Deutsche Craigs.

Of course that's true in other countries too, where stock markets are still attracting new listings.

However, it might matter considerably where the early money comes from. Last month, San Francisco-based social media company Life360 became the latest American company to join the ASX.

Chief executive officer (CEO) Chris Hull said he was avoiding a very noisy spell of IPOs in America amid the hype surrounding companies like Uber, Lyft, Pinterest, and Beyond Meat.

Straker Translations' Grant Straker also chose the ASX rather than the NZX.

But he was also echoing his company's investment history. Its first investor was James Synge of Sydney-based Carthona Capital, who put in US$40,000 in 2008 and took a board seat.

Investors, whether they are the early-stage angel variety with up to a few million dollars to seed a company or later stage venture funds, stopped caring about national boundaries years ago.

So when Grant Straker of New Zealand-based Straker Translations says he couldn't find institutional investors — like big funds and portfolio managers — to take an interest in his growing company in 2015 it mattered. He found interest and ultimately listed his company in Australia.

That's not to say things aren't changing. New Zealand's own private equity funds, among them Direct Capital, Waterman and Maui Capital, have gone from strength to strength.

Also, the latest government budget allocated another $300 million to early investment in New Zealand companies through the New Zealand Venture Investment Fund. It aims to bridge a funding gap between very early investment in start-ups and the later funding rounds that raise over $15m.

Andrew Bascand, managing director of Harbour Asset Management says KiwiSaver is growing up too. As more of this multi-billion dollar pot of New Zealand money is allocated to private equity, he says, domestic investment in local start-ups will grow.

It can't happen too quickly for the NZX. Its shares have gone sideways for years and it's already under mounting pressure from disgruntled shareholders. While the company says it's making significant changes to encourage growth, it might easily find itself a takeover target by a foreign exchange.

After all, some parts of its business remain attractive. Bascand points out that the NZX has grown its capital base handily in the last decade, with many listed companies continuing to tap the market with secondary share issues. 'The market itself is bigger.'

Still, it would be tough to justify government intervention if a takeover offer did emerge, especially given how little the exchange has been able to nurture small and mid-sized companies. Though the loss of domestic control of such a pillar of New Zealand Inc would be a blow to the country's economic psyche.

None of this is new to NZX CEO Mark Peterson. That's why he's teamed up with the Financial Markets Authority (FMA) to review the country's capital markets, with a report due under chairman Martin Stearne in the third quarter. Stearne is not yet ready to talk about what might be done.

Ironically, it may be trends far removed from any strings the exchange and the FMA can pull that finally release a new wave of listings.

Hawkes Bay Regional Council has confirmed it intends to float a minority stake in the Napier Port as early as July. It's a move that's likely to push other local councils to follow suit, floating more infrastructure assets that badly need money for expansion.

Cannabis companies may similarly come to constitute a wave and follow Cannasouth on to the NZX. The company's float is being watched closely by its peers.

Paul Manning, co-founder and executive director of Helius Therapeutics, says his firm also anticipates a public listing 'in the not too distant future'.

He'll wait for measures like revenue and clear government regulations but he called the move an obvious next step.

He can't be definitive but as a locally-owned company he'd certainly prefer to list at home.

* Kate MacNamara has been a journalist for 20 years. She covered business and trade for the Canadian Broadcasting Corporation, and also as a contributor for the BBC.