Warning signs of a broken capital market
For most of this year, the price board which clings to the NZX headquarters in a historic building on the Wellington waterfront has been blank. Once a dynamic photo backdrop for tourists and company executives with major events at the stock exchange, the broken board has had a depressing symbolism about it.
Aside from a burst of activity driven by the former National-led government selling stakes in state-owned electricity companies, the stock exchange has struggled for years to attract enough new companies to offer shares on its platforms.
(A story for another day is that apparently Wellington City ratepayers are to pay tens of thousands of dollars towards the repair of the price board.)
Yesterday, the NZX faced a major attack which argues that its strategy, like its price board, could be broken. Christopher Swasbrook, head of activist firm Elevation Capital, argues that after years of poor financial performance and rising costs, the NZX strategy document released at the end of 2017 is effectively waffle. Words on a page with no measureable targets. If the performance of the company cannot be measured, it will be hard to hold the company to account.
He also highlighted what he claims is corporate largesse at the stock exchange. Although his focus was broad, delving into the increased size of the executive and overall staff costs, he highlighted a particular example which is likely to cause the NZX board the most pain.
In September, up to 11 NZX board members and staff flew to New York. There they were pictured celebrating a memorandum of understanding (which again, has nothing measureable in it) with stock exchange operator Nasdaq. At a time when the political winds are changing, from a company which has seen virtually no increase in its share price in six years, it may become a photo opportunity to regret.
Rather than defend the merits of the trip, the NZX is refusing to comment beyond a written statement which appeared to suggest it agreed with Swasbrook on many points, without addressing others.
For those of us who do not own shares in NZX, it would be easy to dismiss Swasbrook’s attack as a corporate exercise of little relevance. But the importance of the NZX to New Zealand lies in much more than its performance as a company. It is a central part of the capital markets of New Zealand. For the holders of an increasing pool of KiwiSaver funds – already worth tens of billions of dollars – it has a significant influence on where the money ends up.
Sam Stubbs, head of non-profit KiwiSaver provider Simplicity, quickly joined the attack, arguing that some of NZX’s businesses effectively compete with businesses like his. This means, in effect, the company has a strategy of competing against its own customers, rather than what would appear to be its primary job – creating a platform for a strong and healthy capital market.
Other figures in the financial community were more reserved, but it is clear that there is frustration at the company’s strategy.
The conditions for the NZX are certainly mixed. The number of companies looking to offer shares on the exchange is falling, and the Labour-led Government is unlikely to offer more opportunities by way of partial privatisations.
But the amount of money looking for a home is booming and the Government is saying very publicly that it wants to find better ways to fund infrastructure.
According to Stubbs, KiwiSaver alone is throwing about $15 million a week into New Zealand’s capital markets. While much of that will – and should – be invested overseas, plenty of it will be available to encourage New Zealand companies to grow and possibly to fund major public projects.
Billions more will flood the market in the coming decades and it is critical there is a platform for that money which properly serves New Zealand’s interests.
Even Swasbrook appears to be basing some of his arguments on the greater needs of New Zealand, rather than as a fund manager trying to get the best price for the 6.2m NZX shares he controls.
His previous moves have pressed for companies to be broken up, but in this case he wants no such thing, warning that a sale of the NZX to its Australian equivalent would be the greatest admission of failure.
In a country where the views of the power brokers in the financial community are rarely publicly aired, Swasbrook’s move could potentially spark a debate on how New Zealand can harness demand for things to invest in. The feeble refusal to engage in the argument suggests NZX may not be interested in engaging in such a conversation.
In effect, the company has a strategy of competing against its own customers, rather than creating a platform for a strong and healthy capital market.