There are a number of important sharemarket events next week including Serko’s listing on Tuesday, Gentrack Group on Wednesday and GuocoLeisure’s delisting on Friday.
Serko and Gentrack have their own attractions but it is extremely unlikely that they will have the same influence on the domestic corporate sector as GuocoLeisure, formerly known as Brierley Investments Limited (BIL).
BIL was New Zealand’s most influential company throughout most of the 1970s and 1980s with one in every 20 New Zealanders owning shares.
BIL also had a huge number of copycats as there were 22 NZX-listed companies with the word investment(s) in their name at the end of 1987. A substantial number of additional NZX entities were also classified as investment companies, all trying to emulate Sir Ron Brierley and BIL.
One can confidently predict that the NZX will never experience another Brierley Investments.
Ron Brierley was born in Wellington on August 2, 1937 and joined Sun Insurance straight out of school while studying accountancy part-time at Victoria University.
In November 1956, at only 19, he published the first edition of his New Zealand Stocks and Shares, a sharemarket newsletter. He attracted 2000 subscribers and incorporated R.A. Brierley Investments Ltd on March 30, 1961.
The newly formed company issued a prospectus nine months later which raised £36,025.
The company’s primary objective was: “To take over or acquire substantial holdings in certain public companies, both in Australia and New Zealand, with a view to ultimate participation in management and the re-organisation and improvement of their finances. This will apply particularly to “dead” companies which have considerable assets but low earning capacity due to poor management. The ideal situation is one in which surplus assets can be sold and the funds re-invested for the more useful development of an existing business.”
However, the investment group’s first purchase was New Zealand Stocks and Shares from Brierley for £4000.
Nevertheless, at 23 Brierley was ready to take on the country’s conservatively run listed companies.
By contrast, Warren Buffett was 25 when he formed Buffett Partnership Ltd, an investment partnership in Omaha, Nebraska.
Meanwhile, Brierley got up the noses of the New Zealand business community in the early 1960s but BIL failed to achieve its prospectus forecasts, both in terms of earnings and dividends.
Brierley also established a beachhead across the Tasman by acquiring a controlling stake in Industrial Equity Limited (IEL), a small non-operating company listed on the Melbourne Stock Exchange.
On this side of the Tasman Brierley was an outcast, shunned by the establishment. He made numerous attempts to list BIL on the NZX but he was turned down each time. The three South Island exchanges – Christchurch, Dunedin and Invercargill – were particularly hostile. However, Brierley was finally accepted on his seventh application and BIL listed on the NZX on March 2, 1970, on a compliance basis. Brierley was 32 while Buffet was 34 when he gained control of Berkshire Hathaway in early 1965.
The rest, as they say, is history.
Berkshire Hathaway has gone from strength to strength with a sharemarket value of US$313 billion ($359 billion). Buffett owns 20.5 per cent. BIL was New Zealand’s largest listed company with a market value of $7.7 billion in 1986 but it will quietly disappear from the NZX next week with a value of around $1.4 billion.
The 1970s and early 1980s was the ideal period for Ron Brierley because most New Zealand companies were asset rich but earnings poor and there were no effective takeover or insider trading regulations.
A clear majority of NZX companies owned all of their operating properties and these assets had cost-based balance sheet values, rather than market-based. This represented a fantastic opportunity for corporate raiders who would sell these undervalued assets for substantial, one-off, profits.
Control of these companies could be easily obtained because there were no effective takeover rules while brokers and investment bankers were falling over backwards to do business with BIL.
Brokers would encourage fund managers to accumulate holdings in potential BIL target companies and when BIL suddenly entered the market to purchase a quick 20 per cent, 30 per cent or 40 per cent of a listed company the brokers would convince fund managers to sell.
These fund managers were well rewarded for providing “warehousing facilities” for BIL because brokers would then encourage them to invest in the next potential BIL target. There was nothing illegal about these activities, particularly as the fund managers were not specifically told that the recommended companies were a potential BIL target.
However, there was a code of communication which made it clear to most managers that a strongly recommended company would probably be the next BIL target.
The problem with BIL’s strategy was that there was a limited number of “dead” companies and potential one-off asset sales. There were also more and more BIL look-a-likes trying to identify and purchase controlling interests in these companies. BIL was running out of “dead” company victims and it had to look at growth companies in the mid-1980s. This was a totally different investment style that BIL was less suited to.
Tony Williams was one of the first commentators to compare Brierley with Buffet in his 1999 book The Rise, Fall and Flight of Brierley Investments. Williams wrote that Buffett looks for companies with good products, strong management and excellent long-term growth prospects.
By contrast Brierley sought out “dishevelled, disorderly and unattractive” companies where he saw hidden value. Williams wrote “even today  he is effectively groping around at the bottom of a ragbag of stamps hunting out the bargains”.
Brierley came unstuck when BIL purchased UK-based Mt Charlotte Hotels, now called Thistle Hotels, and when Guinness Peat Group (GPG), which was founded by Brierley, acquired UK-based Coates. These two 100 per cent acquisitions were outside the traditional “dead” company expertise of Brierley and his BIL and GPG executive teams.
The irony of BIL is that the company’s fantastic success in the 1970s and 1980s was due to its ability to prey on New Zealand companies that wouldn’t adjust to a changing environment, businesses that were still run as they were in the 1950s.
Brierley fell into the same trap as he failed to adjust to a changing investment environment and to adopt best practice corporate governance standards. Most private equity firms are doing a much better job these days than the BIL/GPG type organisations.
Brierley now runs Mercantile Investment Company, which is listed on the ASX with a market value of just A$33 million. It appears to have the same investment style as BIL and GPG in their early days.
There will never be another BIL because we now have a Takeovers Code and we don’t have a large number of companies with under utilised and undervalued assets. We will probably never have another company with over 160,000 shareholders that packs annual meetings with shareholders queuing for hours to have a few words with a revered chairman.
Brierley Investments will be missed but its operating style was far more suited to the 1970s and early 1980s than the 21st century.
Serko and Gentrack will be welcomed to the NZX with champagne next week while GuocoLeisure (nee BIL) will quietly disappear nearly 44 years and four months after the stock exchange establishment finally allowed Brierley to join their exclusive club.
Disclosure of interest: Milford Asset Management holds Serko and Gentrack shares on behalf of clients.