Feed the ducks when they’re quacking
IN AUCKLAND Airport’s case much of the strong relative performance has happened in the past year, with Auckland Airport up 46.5 per cent against the S&P/NZX50 up 14.6 per cent.
There’s a saying in capital markets – ‘‘feed the ducks when they are quacking’’.
It means meet strong demand for investments with supply. At the moment the market is ‘‘quacking’’ for high earnings certainty stocks, including shares in infrastructure and utility companies. This is a great opportunity for some Local Authorities to follow the New Zealand Government’s lead and list part stakes in infrastructure and utility assets using a mixed ownership framework.
Governments and local authorities do an excellent job of investing in long-term assets that create real societal value. As these assets mature, and become sustainably income-generating, they represent an asset that can be partly realised to reduce debt levels or to fund investment in new public assets.
Where appropriate frameworks are in place to ensure service standards are maintained, and regulatory structures protect against monopolistic practices, selling or partly selling assets as listed companies on the New Zealand stock exchange is a viable part of a local authority’s funding ‘‘tool kit’’ relative to increasing rates or increasing borrowing.
The mixed ownership model, whereby a government-owned entity lists on the stock exchange and sells some shares to private investors, allows the broader public to benefit from a release of capital while ensuring underlying businesses deliver a continuing public good.
History suggest part-sell-downs of infrastructure assets have been well received by equity markets.
Auckland Airport and Port of Tauranga have been listed on New Zealand stock exchange as mixed ownership infrastructure businesses for a long period. They have also generated some of the best returns for all shareholders.
In the 10 years between July 2005 and July 2015, the S&P/NZX50 index returned an annualised 5.8 per cent a year. During that same period, Auckland Airport returned 13.3 per cent a year, while Port of Tauranga delivered an 18.6 per cent annualised return to shareholders.
In Auckland Airport’s case much of the strong relative performance has happened in the past year, with Auckland Airport up 46.5 per cent against the S&P/ NZX50 up 14.6 per cent.
This highlights just how strongly investors globally have been drawn to companies with predictable earnings such as airports in a low growth, low interest rate environment.
GOVERNANCE outcomes for non-government investors in listed mixed ownership businesses have also generally been positive. Government and local authority appointed board members have on the whole successfully focused on the businesses they are charged with monitoring to the benefit of all investors.
Whether the value of these assets would have been higher for local authorities if they had not been listed is a moot point. What is clear is that as listed companies they have generated great returns to all investors and contributed positively to the growth of the communities in which they sit.
Listing a company generally improves transparency by establishing underlying asset values, as long as value is measured in the medium term. This is particularly helpful where local authorities are also raising debt and need to provide a gauge of underlying asset value to debt investors.
In some cases, partly selling even a modest proportion of a local authority/government controlled asset by way of listing on the stock exchange sees the value of the residual public holding worth more than its prelisting value, even allowing for the portion of the business that is now owned by other investors.
In an environment of muted global economic activity and low interest rates assets, such as airports, sea ports and lines companies stand out as offering the potential for relatively predictable and sustainable earnings and dividends.
While in the near term capital market enthusiasm for such companies is high, this support is likely to continue in the medium term as populations age and investors increase exposure to assets that can deliver lower risk returns to fund their retirement.
Whether local authorities choose to feed the hungry rakiraki (the Maori translation of duck) with part listings of infrastructure assets now, or at a later time, part listing of assets in a mixed ownership framework provides them (and their constituents) with a useful mechanism to fund public asset investment for future generations.