This was article first published by ALB online in September 2013.
Retail investor participation in the New Zealand share market has been relatively low since the devastating bust of 1987, particularly compared to Australia, but indications are that confidence is now beginning to return.
The NZX’s equity capitalisation has risen from NZ$46.6 billion in 2008 to NZ$77.9 billion this year, or from 27% of GDP to more than 37%. The upturn has been driven by a range of factors:
- relatively low global interest rates, making the traditionally high yields delivered by New Zealand listed companies more attractive to investors
- a strengthening domestic household savings position since the establishment in July 2007 of the KiwiSaver retirement savings scheme
- the growth of the New Zealand Superannuation Fund, which now has over $22 billion in assets, of which 5% is currently invested in New Zealand equities
- gradually improving policy settings and a new regulator, and
- the Government’s Mixed Ownership Model (MOM) programme.
The first of the MOM floats was of electricity generator/retailer Mighty River Power, in May, and raised NZ$1.7 billion. This will be followed by the Meridian and Genesis Energy IPOs, which are expected in the last quarter of this year and the first quarter of next year, respectively.
Meridian is the biggest of the three ‘gentailers’ with a potential offer size of NZ$3 billion – a blockbuster by New Zealand standards, so the offer is being made with an instalment receipt structure to defer payment of 40% of the price for 18 months.
The Government also plans to sell down some of its 75% stake in Air New Zealand.
But there has also been a steady stream of new offerings from the private sector, suggesting that appetites for stocks are returning, providing a much need alternative outlet for savings to the traditional Kiwi love affair with residential property.
Offers which have generated strong demand include:
- Z Energy – an $840 million offer, representing a float of 60% of the transport fuels business bought from Shell by Infratil and the New Zealand Superannuation Fund in 2010
- EBOS Group – the pharmaceutical and healthcare distributor raised $239 million from a placement and rights offer in connection with the $1.1 billion purchase of Australian pharmaceuticals wholesaler, Symbion
- Summerset - the retirement village operator now also listed on the ASX raised $120 million through an IPO in 2011, and
- TradeMe – the auction website IPO which raised $365 million.
In addition, there have been a number of smaller IPOs – including brewing company Moa, dairy processor, Synlait, and technology companies SLI Systems and Wynyard.
More effective disclosure by issuers is a stated goal of New Zealand’s new Financial Markets Authority (FMA), set up in 2011 to replace the Securities Commission. The FMA has stated that New Zealand’s financial disclosures have historically been characterised by “poorly presented or inaccurate investment documentation and legal jargon that the average citizen cannot understand.”
In June 2012, it issued a Guidance Note on Effective Disclosure which prioritised “clear, concise and effective” disclosure of material matters to investors.
The “clear, concise and effective” standard, although not currently binding, will become a legal requirement with the introduction of the Financial Markets Conduct Act. This will require a culture shift as the evidence from recent IPOs is that issuers prefer the safety of a comprehensive offer document.
After a slow start, New Zealand issuers are increasingly taking advantage of the ability to make concurrent offers in New Zealand and Australia under the mutual recognition scheme for trans-Tasman securities offers. Recent examples include Kathmandu, Mighty River Power and Z Energy.
New Zealand issuers are able to use their New Zealand offer document (including financial statements that comply with NZ IFRS, as opposed to AU IFRS) to make an offer in Australia, with only limited additional disclosures. Recent experience is that this has been important in allowing issuers to meet demand from Australian institutions for an ASX listing without imposing restrictions on those institutions’ ability to freely trade shares post the IPO.
Large retail offers under mutual recognition still face some hurdles, such as the differing “consideration periods” of the FMA and ASIC (usually 5 business days in New Zealand, 14 days in Australia). This results in staggered offer openings with the logistical problems that entails. Further alignment between the NZX and ASX on their requirements would also be desirable, to avoid imposing overly complex day-to-day compliance obligations on dual-listed issuers.
A number of media commentators have focussed on the paucity of useful analysis of recent IPOs available to New Zealand investors. This is partially a product of US-driven restrictions preventing investment banks from publishing research on a company being advised by their banking arm, and caution around pre-prospectus publicity prohibitions. Also, recent changes to laws affecting financial advisers in New Zealand have increased the risks around providing investment advice. It appears that the appetite from institutions for assuming these risks where the potential rewards are low is limited.
The future – the Financial Markets Conduct Act
The Financial Markets Conduct Act represents a fundamental – bottom up – rewrite of New Zealand’s securities framework. Changes affecting securities offerings include:
- a new system for disclosure documents - a product disclosure statement providing key information for investors, with content to be prescribed by regulations; other material information to be contained in an on-line register entry
- principles based rules for offer advertisements, including relaxed requirements for pre-regulated offer publicity
- a mechanism for on-going disclosure by issuers, intended to focus on debt and managed investment products, and
- reorientation of liability for defective disclosure to civil remedies and penalties, in place of strict liability criminal offences, balanced by improved due diligence and reasonable reliance defences.
The Act will come into effect progressively, starting in April 2014, and will require substantial adjustment by market participants. The FMA will also need to give some thought to how this fundamental change to NZ’s securities laws will affect existing exemptions available to trans-Tasman issuers - and (in conjunction with ASIC) the interface with the trans-Tasman mutual recognition regime.
This article was written by Josh Blackmore, a senior associate at Chapman Tripp, specialising in corporate transactions. He most recently advised on the Z Energy IPO.
Chapman Tripp has advised the listed issuer on the EBOS, Z Energy, Summerset, Moa, SLI, Wynyard and Mighty River Power capital raisings and is advising Treasury on the upcoming Genesis IPO and acting for the Instalment Receipts trustee on the Meridian IPO.