Steps to stronger capital markets
There is a case for improvements across the entire market ecosystem. This will require co-ordinated change
Despite those facts, the debate about the health of our capital markets centres on the number of initial public offerings (IPOs) or new equity listings. This has led some commentators to criticise 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. The NZX is fundamentally a marketplace and 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 across the entire market ecosystem. This will require co-ordinated change. Here are five ideas FNZC reckons will make a positive difference:
education
The NZX can co-lead presentations with the key market gatekeepers, namely the legal, investment, accountant and banking communities. We all have a role, whether that is to better explain the benefits of the listed capital markets, when to involve advisers, how to attract capital or how to engage with investors after listing.
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.
indices 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 that are already included in the NZX 50. How about broadening index inclusion criteria to suit New Zealand, rather than simply including an arbitrary number of stocks?
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 per cent 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 $150 million.
The team at FNZC has already built this index and we’re happy to share it.
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 18 more 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 suit their needs.
information and access for selfdirected investors, allowing self-managed KiwiSaver
If we widen the index, we will widen the research. If we widen the number of funds that can invest and improve information for self-directed investors, we can improve market liquidity too. If we achieve both those things, it becomes easier to list new companies via IPOs. A virtuous cycle!