By James Lee, Managing Director and CEO, FNZC
If the New Zealand economy were a human body, then we can think of capital as the oxygen required to sustain life.
In a functioning capital market, those seeking capital are brought together with those who wish to deploy it. This lowers the cost of equity and debt, boosts the growth of funding and sparks wealth creation.
Is this economic oxygen flowing as it should? Most New Zealand companies listed on the stock exchange (NZX) have unrestricted access to capital, enjoy diverse and internationally based registers, and are trading at fair to elevated multiples.
Last year, our capital markets had 30 equity issuances (new and follow on) and 20 debt issuances. The equity market returned more than 20% to investors. That’s not a bad scorecard for 2017.
Despite those facts, the debate about the health of our capital markets centres around the number of Initial Public Offerings (IPOs) or new equity listings. This has led to some commentators criticising the set-up and operations of the NZX. In our view, blaming the NZX for the lack of IPOs is like blaming Trade Me for the lack of affordable homes in Auckland. The NZX is fundamentally a market place and currently has many roles to play, but can hardly be seen as the sole problem.
We could do better, however. While there’s no single, easy solution, there’s a case for improvements to be made across the entire market ecosystem. This will require co-ordinated change. Here are five ideas FNZC reckons will make a positive difference:
The NZX can co-lead presentations with the key market gatekeepers namely the legal, investment, accountant and banking community. We all have a role to play, whether that is to better explain the benefits of the listed capital markets, when to involve advisors, how to attract capital or how to engage with investors post-listing.
Grow the private equity and venture capital community.
The private equity community is the pipeline for the listed market, via IPOs, and a healthy IPO environment requires a buoyant private capital pipeline. To help achieve this, we should expand KiwiSaver to include private equity, allowing growing companies to access growth capital and providing investors with access to wider investment choices. De-risking growth and providing efficient access to capital is the purpose of capital markets and as more companies use the capital market, we can remove any negative perception that raising capital is either hard or a sign of failure.
Create indices that are reflective of New Zealand.
Current practice limits the bulk of passive investors to 50 stocks. Even the Mid Cap index, run by the NZX, only includes companies which are already included in the NZX50. How about broadening index inclusion criteria to suit New Zealand, rather than simply including an arbitrary number of stocks (50 in New Zealand’s case)?
The MSCI global index calculates inclusion criteria off total market capitalisation and then adjusts market weights to be based from free float. If NZ were to apply the MSCI methodology, our new index would:
Reflect 99% of the total market capitalisation of New Zealand;
Increase the number of companies to 79; and
Every company in the index would have a total market capitalisation greater than $150m.
The team at FNZC has already built this index and we’re happy to share it with those who want to see it.
Putting your money where your mouth is.
The industry could help seed new investment funds using its own capital. If all participants that manage more than $1 billion of client money used their own capital to launch or seed one new fund or strategy, we would have another 18 funds in the New Zealand market. If half survived, that would build the ecosystem to allow for increased research coverage, more diversity in terms of investment views, and would in turn increase diversity of returns – all of which benefits retail investors by giving them more choice in terms of investment products and styles to better suit their needs.
Improve information and access for self-directed investors, allowing self-managed KiwiSaver to be born.
If we widen the index, we will widen the research. If we widen the number of funds which can invest and improve information for self-directed investors, then we can improve market liquidity too. If we achieve both of those things, then it becomes easier to list new companies via IPOs. A virtuous cycle!
The markets did well in 2017 but FNZC believes there are a few simple ways we could all help to improve the capital markets in New Zealand – the oxygen of our economy. It’s an issue we care about because we’ve been part of New Zealand’s capital markets for nearly sixty years and have seen how closely the fate of our economy is intertwined with the health of the capital markets. Everyone will have their own course to plot but we believe it’s time for market participants to come together and agree what we can to do to support the shared objective of improving the capital markets in New Zealand.
This article contains the views of FNZC. It is not to be relied upon as a basis for making any investment decision. We welcome the opportunity to have a discussion any investment decision with you.