A report called Growing New Zealand’s Capital Markets 2029, sponsored by the NZX and the FMA, was released last week. Why should this be of interest to you and what is Milford doing to assist the development of New Zealand’s capital market (NZX)?
A growing capital market is important for a well-functioning economy. When capital flows into NZ businesses this supports increased investment from those companies and ultimately results in economic growth. New Zealand has traditionally lacked investment capital to enable businesses to grow at their full potential.
KiwiSaver has been a catalyst for a significant proportion of New Zealanders to begin their investment journey. However, without a well-functioning capital market in New Zealand, an increasing proportion of these savings will head offshore. Currently, KiwiSaver investors have over three times the amount invested in International and Australian shares as they do in New Zealand shares.
Why is only 10.7% of KiwiSaver money invested in NZ shares? Three key reasons: market size; growth potential; and liquidity. Fund managers cannot invest solely into the NZX, as this would represent too large a proportion of the market, limiting their ability to sell stocks to de-risk. But they could allocate a higher proportion of their funds to NZ shares, if the market was larger.
The report notes that the KiwiSaver regime fosters investment in lower growth assets and has limited exposure to private markets. So, in a bid to extend the range of opportunities for Milford investors, we also invest in private, medium-sized growth NZ businesses, and have done so for over five years. Generally, we invest money directly into the business to fund R & D, purchase fixed assets or provide working capital to keep growth rates high. On average our portfolio of companies are growing revenues at between 20 – 40% per annum.
A well-functioning local capital market is crucial to provide the ‘next step’ for these growing New Zealand companies. Unfortunately – as the report found there is a lack of depth in the small and mid-market meaning few of Milford’s private companies look destined for the NZX.
We believe growth in the number of small to mid-sized stockbrokers and small to mid-cap fund managers is needed to align with the size of these potential listing candidates. Unfortunately, the significant time and capital involved in dealing with the beefed up regulatory and compliance regimes, as outlined in the report, and the dominance of the large stockbrokers in New Zealand, is stymieing our market evolution and not providing the opportunities for smaller brokers and mid-cap managers to gain traction.
While the Capital Markets 2029 report had a number of wide ranging recommendations to improve the NZX, we believe educating advisers to be able to recommend small to medium sized listed companies and enabling some self-directed investing in KiwiSaver could improve the functioning of the small-to-medium end of the NZX.
If the situation for listing medium-sized organisations onto the NZX improves, Milford is well placed to participate as a shareholder in multiple potential listing candidates. If not, our investors with exposure to our private investments, including our KiwiSaver investors, will still have assisted in growing these companies and should benefit from the value created with their capital.
The full report can be reviewed here: