Is private equity poaching acceptable?
NEW Zealand needs to decide whether it is acceptable for so many companies to be snapped up by overseas private equity firms long before those companies are developed enough to list on NZX, Financial Markets Authority chief executive Rob Everett says.
‘‘If all the best investment opportunities are taken up by private equity, what’s available for listing, more often than not, will have had all the juice squeezed out of it,’’ Mr Everett said.
NZX has tried a number of things to try to encourage smaller and earlier-stage companies to list by establishing a junior board.
But three iterations — the New Capital Market, Alternative Market and the shortlived NXT Market — tried since early 2000 have all failed to fire.
NZX finally threw in the towel last year when it decided to fold the two remaining junior boards, AX and NXT, into the main board.
‘‘That, in many ways, is the crux of the issue,’’ Mr Everett said.
‘‘If you look at the New Zealand economy, most of the companies that are being bought by overseas private equity are a long way from being ready for listing.’’
This situation and the consequent dearth of new equity listings on NZX have inspired the current formal review, Capital Markets 2029, which is designed to try to revive listings.
Not only are new equity listings on NZX almost nonexistent — there were two last year, neither of them initial public offerings, and two in 2017, only one of them an IPO — but takeovers and business failures mean the number of equity listings has dropped steadily year after year, most recently to 138 in December from 173 in December 2015.
Mr Everett said the review needed to take a much broader look: ‘‘You can’t have a conversation about more listings unless you look at the entire ecosystem.’’
Another attempt to generate early stage capital to fund new businesses was including crowdfunding rules in the Financial Markets Conduct Act passed in 2013.
Mr Everett said legislators took ‘‘quite a brave step’’ creating the crowdfunding regime but it had not taken off.
An obvious question is whether merchant bankers and fund managers are less willing to take risks.
TIL Logistics, with a current market capitalisation of $119.2 million, listed in late 2017 via a backdoor listing because its owners were told there was no support for an IPO.
TIL’s size and operations are reasonably comparable to those of Mainfreight, which raised $57 million by selling shares at 96c each in its 1996 float. Mainfreight has since expanded globally and its market capitalisation is now $3.2 billion, or $32.01 per share.
TIL had already demonstrated an appetite for growth before its listing.
So why was Mainfreight’s listing possible in 1996 but TIL’s was not in 2017?
The evidence of recent rights issues from Fletcher Building’s $750 million issue last year to Gentrack’s $90 million and Seeka’s $50 million issues appears to show that underwriters will only take ‘‘risks’’ when the outcome is a sure bet that could be achieved without underwriting.
Mr Everett said the New Zealand firms were small by international standards, so ‘‘It only takes one or two to go wrong’’ and possible New Zealand underwriters would be severely damaged, if not wiped out.
The resources required to support early stage capital raising through to an NZX listing were matters the review needed to examine, he said.
‘‘My impression is that there’s a fairly strong sentiment among New Zealand investors that, ideally, they would like to be supporting the New Zealand economy — people want to support New Zealand businesses.
‘‘At the moment, the opportunities for them to do so aren’t there because New Zealand businesses aren’t listing and there aren’t mechanisms further down the chain.’’
The review results are expected to be published in the September quarter. — BusinessDesk