After attempts at diversifying, the stock-market operator NZX is promising to return to what it does best.
Just one new company, aged-care operator Oceania Healthcare, came to market in 2017, listing on NZX’s main NZSX board. Meanwhile, the response to NZX’s low-cost, reduced-compliance NXT and NZAX markets has been so underwhelming it is rethinking them.
Exciting-sounding companies such as Volpara Health Technologies, Powerhouse Ventures, CropLogic and Martin Aircraft have shunned NZX’s offering in favour of listing in Australia on the ASX. NZX, which has been diversifying in recent years, including making a foray into the media, is now reconsidering its future.
All that could be discouraging, at best, for the market operator, which has been working hard to put its house in order, lifting the governance standards for its 180 listed companies, introducing a new set of rules to make the market more attractive and doing a five-month review of its business.
Then up pops Xero’s Rod Drury, a former NZX director, saying thanks, it has been great, but now the ASX looks a better fit. The accounting-software firm, which is listed on both the NZX and ASX, will quit the New Zealand exchange at the end of January. You could be forgiven for thinking NZX chief executive Mark Peterson would be in panic mode, but if he is, he’s hiding it well.
But, then, the news isn’t all bad. The benchmark NZX 50 index topped 8000 for the first time this year and is set to deliver a fifth year of double-digit gains. Low interest rates have encouraged more investors to look at returns from shares and spurred companies to raise money by selling NZX-listed bonds.
That’s important, because capital markets are the principal mechanism for listed companies to raise funds to expand and employ more people, in theory making more productive use of investors’ money than if they put it in the bank or into residential property.
Back to basics
New Zealand has lagged behind Australia in sharemarket growth, mainly because several decades of compulsory superannuation in that country have built up A$2.32 trillion of savings, compared with KiwiSaver’s $40 billion after 10 years (with a forecast to reach $300 billion by 2037).
Under Peterson, the NZX is changing strategy and going back to basics. Previous chief executives took a different approach.
“The market is ready for this real focus on our core,” Peterson says. That also means the exchange’s operations have to be related back to the marketplace, such as through the packaging of its vast database of agricultural information in ways dairy-derivatives traders are willing to pay for.
NZX runs trading platforms, but it can’t twist investors’ arms to back a company, and for new listings, it “comes down to price”, Peterson says.
“The NZX’s prime role is to raise the profile of New Zealand capital markets and try to promote them as well as it can,” says Grant Williamson of Christchurch brokerage Hamilton Hindin Greene, who hasn’t been overly impressed with the new pickings in recent years. “The big challenge for NZX is to get new equity IPOs [initial public offerings] coming to market.”
In addition to Oceania Healthcare, freight firm Transport Investments is set to go public with a reverse listing after failing to get enough support from investors to list by the traditional route. It may emerge before Christmas. But convincing companies to publicly list can be a hard sell when debt is cheap and private equity firms can provide experienced executives and deep pools of capital without any of the hassle and cost of meeting public-company regulations.
Xero to hero
Xero’s Drury emerges as a champion in this regard. On the heels of the company’s NZX delisting announcement, he sold three million of his 20.7 million shares for $94.5 million, boosting the stock’s liquidity ahead of the ASX shift. “One of the great things about going public is you can do this without selling the whole company,” he says.
One of Xero’s key reasons for putting all its eggs in the Australian basket is the potential for inclusion on an ASX benchmark index, which, in turn, should attract deeper analyst coverage and new investors.
NZX is now exploring ways to head off similar exits. It also wants to entice foreign firms with ties to New Zealand to take a local listing. It is also putting emphasis on liquidity – market jargon for the volume of trading. Active stocks are easier to buy and sell.
More trading activity should make the NZX more attractive to prospective listings, giving them confidence that investors will be interested in their story and creating opportunities for company founders to sell down their stakes without giving up control of the business.
Liquidity is improving, says Chapman Tripp partner Roger Wallis, thanks to the participation of a growing number of international firms and institutional investors in the market. NZX’s approach is “refreshing” and shows courage in accepting that the likes of its NXT initiative to attract small and medium-sized companies didn’t work.
Making sure the main NZSX market is operating smoothly is paramount to the wider financial services community. Simeon Burnett, head of equity crowd-funder Snowball Effect, which helps firms in the early stages of capital-raising, says NZX needs to figure out where it wants to position itself. He backs the idea of the local market acting as a nursery for global aspirants before they go out into the world. “We should celebrate the fact New Zealand companies got through,” he says.
Not every Kiwi firm with worldwide ambitions ups sticks as Xero is doing. Mainfreight has turned itself into an international player in transport and logistics, Fisher & Paykel Healthcare does much more of its business overseas than it does at home and payments-software developer Pushpay has made major inroads in the US, where it makes most of its revenue.
NZ Shareholders Association chief executive Michael Midgley says things have got better, but there’s always room for improvement. As the retail shareholder lobby group has gained members – it now claims to represent more investor funds than some of the smaller institutions – its clout has increased.
Midgley says one of NZX’s successes has been winning business from investors who trade outside the exchange. That’s seen the level of what’s known as on-market trades rise to 42% from just 20% in 2010. Cutting deals off-market is perfectly acceptable, but it can undermine the principle of a transparent market.
“It’s all about improving price discovery of stocks,” Midgley says.
This article was first published in the December 9, 2017 issue of the New Zealand Listener.