This article originally appeared in the NZ Herald.
One of the most disappointing aspects of the NZX is its inability to attract new listings or IPOs. New offerings or products are the life blood of any successful company and the NZX is a huge failure in this regard.
Why does the NZX have so few IPOs and what are the consequences of this for investors and the domestic economy?
The accompanying table shows that there have been only 34 IPOs in New Zealand since the end of 2012 compared with 352 in Australia and 5,626 worldwide. These figures are derived from statistics compiled by the World Federation of Exchanges.
The NZX has had only 0.6 per cent of global IPOs over this 51-month period while the ASX has 6.3 per cent. At the end of March the NZX had 169 listed domestic companies compared with 1,979 across the Tasman.
These NZX figures are extremely disappointing because IPOs should be plentiful in a strong sharemarket environment, as we have had in recent years. However, the strong performance of the domestic sharemarket has not encouraged business owners to list their companies on the NZX.
The situation is getting worse, not better.
In the two-year period, 1986 and 1987, the NZX had 115 IPOs, in 1993 and 1994 it had 33 and in the 2003 and 2004 period 46 IPOs. By comparison, there have been only seven IPOs in the past two full calendar years, an extraordinarily low number compared with previous buoyant sharemarket conditions and also compared with other sharemarkets around the world.
The situation looks even worse when one delves into these 34 NZX IPOs and discovers the following features:
- The total first-day listing value of the 34 companies was $13.6 billion, comprising $7.3b in 2013, $4.9b in 2014, falling to $0.1b in 2015 and $1.2b in 2016. There was no IPO in the first three months of 2017 with this year’s only IPO, Oceania Healthcare, listing earlier this month.
- The five largest companies, in terms of first-day listing value, were Mighty River Power (now called Mercury NZ), Genesis Energy, Z Energy, Meridian Energy and Orion Health.
- The three Crown electricity generators represent 50 per cent of the value of the 34 IPOs since December 2012.
- Twenty of the 34 new listings had market values of less than $200 million on listing day.
- Fourteen of the 34 companies are worth less today than they were on their listing day even though the sharemarket has performed extremely well over the 51-month period.
The total value of our post-December 2012 IPOs would have been dismal without the partial privatisation of Mercury NZ, Genesis Energy and Meridian Energy. Since these listings the NZX’s IPO performance has deteriorated and in 2015 and 2016 it had only seven IPOs representing 0.25 per cent of the total global IPOs in number terms and a minuscule 0.05 per cent in value terms.
In the same two years, 2015 and 2016, the ASX had 7.1 per cent of global IPOs in number terms and 1.25 per cent in value terms.
These figures clearly indicate that the ASX has been highly successful in attracting small companies, as well as large ones, to list.
This column was triggered by the response to the interview of Grant Straker, the CEO and founder of Straker Technologies, in last weekend’s Business Herald. In the interview Straker was quoted as saying that he “aims to buy two more translation services this year and list on the Australian Exchange next year”.
This comment initiated a large amount of discussion during the week, mainly as to why an Auckland-based company would want to list on the ASX, instead of the NZX.
There appear to be a number of reasons why Straker made these comments including:
- There is little, if any, emotional nationalism when it comes to business. Most New Zealanders are customers of Australian-owned banks and business owners will list on the ASX if it offers a better proposition than the NZX.
- The NZX is a docile organisation that has been asleep at the wheel for a number of decades. It makes little effort to promote itself to business owners and investors, particularly compared with the ASX and other global exchanges.
- The ASX places a strong emphasis on capital raisings in its corporate overview, while the NZX highlights a large number of non-sharemarket activities, including funds management and wealth management, in its business overview.
- The cost of raising capital is extremely high in New Zealand, particularly for companies that are attempting to raise a small amount of money. Our regulatory regime is extremely expensive and is stifling entrepreneurship as it attempts to eliminate risk as far as investors are concerned.
- The huge reduction in the number of brokers means that there are fewer and fewer broker intermediaries to search out potential listings, to coach companies prior to listing, to organise capital raisings and to advise companies how to continue to attract new shareholders once they have listed. The following figures illustrate the relationship between the number of stockbroking companies and the number of IPOs:
- In 1986 and 1987, when the NZX had 115 IPOs, the country had more than 70 broking firms
- In the 1993/1994 and 2003/2004 periods, when the NZX had 33 and 46 IPOs respectively, there were more than 30 broking companies
- In 2015 and 2016, when there were only seven IPOs, the country had less than 10 broking firms.
The clear message from this is that the NZX is effectively controlled by a small number of big brokers that are primarily interested in large IPOs, for example Mighty River Power, Genesis Energy and Meridian Energy.
The NZX does not represent the interests of investors as it has never had an investment manager or large individual investor on its board even though the recently-released NZX Corporate Governance Code places a strong emphasis on diversity.
The main issue is the NZX’s trading rules, which allow brokers to transact the majority of their trades, in dollar value terms, off-market. The huge amount of off-market trading has helped to push smaller brokers out of business and has discouraged the establishment of new broking firms.
The dismal performance of the NZX and its broking firms, particularly as far as IPOs are concerned, has important economic consequences as it has contributed to the entrenched position of residential property as far as most New Zealanders are concerned.
Reserve Bank of New Zealand statistics show that the total value of individual holdings in residential property has soared by $346.3b, to $1,001.8b, since December 2012 while household investments in NZ-listed shares have increased by only $10.9b, to $31.1b, over the same period.
In other words, New Zealanders have over 32 times more invested in residential property than NZ-listed shares, and individual holdings of NZ-listed shares have increased at a lower rate than the appreciation of the NZX50 Gross Index since the end of 2012.
The other negative consequence of our low level of IPOs is that there is a shortage of domestic investment opportunities, particularly as far as KiwiSaver funds are concerned. As a consequence, KiwiSaver funds will have to invest more and more of their money offshore unless they start purchasing residential property.
Unfortunately, there is no indication of a pickup in IPO activity on the NZX. There are no IPOs listed in the upcoming listings section of the NZX’s website, while there are 21 companies listed in the upcoming floats section of the ASX website.
The ASX is heading towards 70 or more IPOs this year while the NZX could struggle to achieve three IPOs in 2017.