New Zealand exchange urged to address protracted lack of IPOs

13 August 2019

The New Zealand Exchange (NZX), the country’s mainboard, has been urged to address a lack of new listings – an issue that has become more acute over the past two years – with some market participants suggesting a merger with Australian Securities Exchange as a solution, according to market participants that spoke to Mergermarket.
Napier Port, a port owned by the Hawke’s Bay Council, priced its IPO earlier this week to raise more than NZD 200m (USD 130m), and is the first notable listing on the NZX since May 2017, when Oceania Healthcare raised NZD 273m and ended up being the only one IPO in that year. There was no new listing in 2018, followed by this year’s first listing – the NZD 10m IPO by medicinal cannabis company Cannasouth in June.
Apart from Napier Port, which is owned by a local council, the NZX’s IPO pipeline is dry, just to put it bluntly, as many businesses bypass the public market to get bought in the private market or to list offshore, advisors and business owners told this news service.
Andrew Barnes, founder and 50% owner of New Zealand’s largest trustee business Perpetual Guardian, said he is very concerned about the “dysfunctional” market. “We are probably very close to the tipping point where the logical solution is for the NZX and the ASX to merge,” said Barnes, who also invested in some smaller and growth-phase companies.
A private equity practitioner and an advisor who has helped several IPOs over the years echoed the suggestion, noting that combining the NZX and the ASX would make sense as the two markets are interdependent financially.
Earlier this year, the NZX and the Financial Markets Authority (FMA), New Zealand’s capital markets and financial services regulator, started a review aiming to deliver a 10-year growth agenda for New Zealand’s capital markets, said Hamish Macdonald, Head of External Relations and General Counsel of the NZX. The review is looking into a range of issues including “limited number of new listings”, according to an invitation document sent to market participants in May.
Fundamental problems
The lack of IPOs on the NZX is largely due to the fact that the local market is dominated by a small number of brokers that are able to float companies, several market participants said.
Jarden, formerly known as First New Zealand Capital, is by and large the leading one, followed by Craigs, Forsyth Barr, and UBS, and the four combined have probably more than 90% of the market share, according Brian Gaynor, director of Milford Asset Management. “It’s very hard to set up a broker because the market is so dominated by four brokers,” Gaynor said, noting that in comparison Australia has more than 70 brokers.
With the partial or full withdrawal of international investment banks and consolidation of retail firms, the remaining investment banks are “understandably less willing” to support small-cap IPOs, which require as much resources as a large IPO but earn less and are more uncertain with regard to completion and therefore risker to sponsor, said Rachel Dunne, partner at Chapman Tripp who specializes in ECM.
As a consequence, the domination of a handful of brokers leaves little room for adequate competition in price setting on the NZX, meaning businesses cannot necessarily get a full pricing here, both Barnes and the PE practitioner said.
Public vs. private
On the other hand, businesses are often presented “the ready availability of funding or exit opportunities in the private capital markets”, including low cost debt funding, so that they do not have to access the public market and bear “the disclosure, regulatory and sometimes valuation impost that can come with that pathway”, Dunne said.
Perpetual Guardian, now 50% owned by Barnes, is such an example. Barnes tried to float the business on the NZX in November 2016 but scraped the IPO amid market volatility. The company ended up bringing in Direct Capital in 2017 as an equity partner.
This is a typical scenario of public markets fighting with private markets, in which valuations in the private market are readily higher, said a second advisor who is familiar with the local capital markets. The issue is also present in other countries around the world but just seems to be more acute as New Zealand is a small market, he added.
Regulators are also more actively looking into listed companies and people are being more cautious about the advantages and disadvantages of floating a business, said Silvana Schenone, Partner and Head of Corporate at MinterEllisonRuddWatts.
NZX’s 10-year plan
The review, namely Capital Markets 2029, has been underway since the beginning of the year with a final report expected in late August, according to the NZX’s Macdonald.
Several market participants including business owners told this news service that they are not anticipating a lot coming out of the review, since it is too hard to change the status quo. “There isn’t any silver bullet, there isn’t any magic answer,” said Gaynor. “It’s not easy for them.”
A sector expert added that it is basically “a scale issue” with equity pools and for New Zealand it is hard to have a well-functioning equity market with that size.
When asked about the pipeline of new listings, Macdonald said that the NZX team has been engaging with a number of companies that are potentially coming to market in the second half of the year. The exchange is welcoming Napier Port as a high-profile IPO on 20 August, he noted.
Regarding issues raised by market participants, the NZX has been working with new participants to join the market, with the likes of Hobson Wealth, Sharesies and BNP Paribas as recent examples and a pipeline of new participants looking to connect to the NZX, Macdonald said.
To merge or not to merge
The only way to increase the pipeline is to broaden the capital market, said Barnes, who suggested a merger of Australia’s ASX and the NZX. “It is not the hardest thing in the world – you just need a revamped ASX as a common place.”
The ASX has been actively targeting New Zealand-based companies to list there, assisted by the “foreign exempt issuer” category introduced to allow NZX-listed companies to dual list on ASX in a much simpler way, said Schenone of MinterEllisonRuddWatts.
The PE practitioner said a merger of the two bourses would fix the two biggest problems of the NZX – domination of limited brokers and lack of competition in IPO pricing – in one stroke.
Gaynor at Milford doubted that a merger could be an answer to solve the problem but said that it could reduce the cost of listing and might be a way to get Australian investors to invest in New Zealand.
Technically, it is not straightforward for the ASX to own the NZX, which no one can own more than 10%, according to current restrictions. Any deal would need to be approved by the government, Gaynor said.
A second sector expert said that there is still strong support for a local exchange in New Zealand as people recognize the importance it has for the New Zealand economy.
ASX and NZX declined to comment on or speculate about cross-border exchange mergers.
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