This publication explores the revival of New Zealand’s equity capital markets (ECM) since the global financial crisis (GFC). We discuss the factors that have contributed to the rebound, including the implications of the first government privatisation in over a decade. We also summarise the likely effects of the new Financial Markets Conduct Act, which will represent a fundamental rewrite of New Zealand’s securities framework.
Bust to boom
Confidence is returning to New Zealand’s equity capital markets with a steady stream of new offerings and rising numbers of both institutional and ‘mum and dad’ investors.
In fact, New Zealand’s share market is experiencing its strongest year in the past decade according to NZX Limited, the operator of the New Zealand stock exchange. By August, issuers had raised $2.4 billion of equity; and the Meridian Energy initial public offering (IPO), widely expected to be one of New Zealand’s largest ever IPOs, opened in September.
NZX’s equity market capitalisation has risen from $46.6 billion in 2008 to $77.9 billion in 2013, or from 27% of GDP to more than 37%.
This mirrors the global picture, as worldwide equity fundraising is up 16.3% year to date according to Thomson Reuters data at 26 September. And market commentators are predicting even stronger growth for the fourth quarter.
NZX chief executive Tim Bennett noted that the recent increase in local activity reflected not only a more positive global environment but, and more importantly, “the impact from a number of structural changes in the market that are not only benefiting NZX, but the economy as a whole”.
The upturn has been driven by a range of factors, including:
- 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, with funds under management currently exceeding $14 billion.
- 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 financial markets policy and a new regulator, and
- the Government’s Mixed Ownership Model (MOM) share offer programme.
And the action looks likely to continue.
The story unfolds
After the post-GFC lows of 2008 and 2009, a new chapter started for New Zealand’s equity capital markets in late 2011 with the listing of retirement village operator Summerset.
Summerset was the largest IPO in New Zealand for more than two years, raising $123.6 million. Until that point, private equity firms exiting by way of IPO had been regarded with some caution by New Zealand retail investors. However, the Summerset IPO has been successful for both investors and the seller, Quadrant Private Equity, which retained a significant stake in the business. During September 2013, Summerset’s shares traded on the NZX Main Board at an average price of over $3.00, a significant increase to the offer price of $1.40.
Following Summerset in late 2011, auction website Trade Me undertook an eagerly anticipated IPO, raising $365 million and listing on the NZX Main Board and the Australian Securities Exchange (ASX).
In 2012, craft beer brewer Moa raised $16 million through its IPO, drawing considerable media attention with its innovative, magazine style offer document which included paid advertising – a world first. Then the Fonterra Shareholders’ Fund raised $525 million, offering the public a novel way to invest in the New Zealand dairy industry, and was heavily oversubscribed as a result.
Busy start to 2013
Mighty River Power, the first of the Government’s MOM share offer programme, began trading in May of this year, having raised $1.7 billion in the IPO.
Two other energy companies will follow: Meridian shares are expected to commence trading on 29 October and the Genesis IPO is planned for the first quarter of 2014. The Government also plans to sell down some of its 75% share in Air New Zealand, and expects the total programme to raise around $5 billion.
Z Energy’s July listing was New Zealand’s largest IPO outside the MOM programme in the last decade, raising $840 million.
The success of the Z Energy IPO, which was significantly oversubscribed, is a clear sign that:
- current equity capital markets activity is not limited to the government sector, and
- New Zealand investors are more than ready to turn to stocks as an outlet for their savings.
Other IPOs in 2013 include Wynyard Group, SLI Systems and Synlait. The Mad Butcher franchise was also reverse listed through Veritas Investments.
And it’s not just IPOs keeping the capital markets active. Many of the country’s largest acquisitions have been funded by equity raisings or comprised major block trades. For example, the EBOS Group’s purchase of Australia’s Symbion for $1.1 billion was in part financed by a $239 million placement and rights offer. Major block trades to date in 2013 include News Corporation’s sale of its 43.6% stake in Sky Network Television for $815 million, Quadrant Private Equity selling down its stake in Summerset for $97 million in March and for $89 million in May, and Guinness Peat Group plc. selling out of its 34% stake in TOWER for $118 million.
In April Hellaby Holdings raised $50 million through an institutional placement and share purchase plan (SPP), and in June Metlifecare raised $80 million through its placement and SPP. Abano Healthcare’s SPP has recently closed and was heavily oversubscribed.
Strength through regulation
Since the Capital Market Development Taskforce reported back in 2009, there has been an increased focus on regulatory reform in New Zealand. The Financial Markets Authority (FMA) was established in 2011 to replace the Securities Commission and took on a broader regulatory role.
The FMA is vocal about the need to simplify offer documents for non-expert investors and has issued a guidance note on effective disclosure which prioritises “clear, concise and effective” offer documents, a concept borrowed from Australia.
The FMA has also indicated that it would like to see shorter offer documents. However, under current legislation, directors face criminal liability for defective disclosure, even when there has been no intent to mislead or deceive investors. This has resulted in longer, more detailed, and often combined investment statements and prospectuses as directors seek to ensure that all relevant information has been disclosed.
In August 2013, the Financial Markets Conduct Act, described as a “once in a generation” rewrite of capital markets law, was passed and will come into effect progressively from April 2014.
Investment statements and prospectuses will be replaced by a single offer document – the product disclosure statement (PDS) – with any additional information placed on an online register. Clear, concise and effective disclosure will be the key test under the new regime, reflecting the principles of the FMA’s guidance note.
While there will be a compulsory element of regulated content in the PDS, the existing ‘one-size-fits-all’ disclosure in an investment statement has been jettisoned in favour of specific regimes tailored to the type of product being offered. Where product comparability is important for investors, such as KiwiSaver schemes and managed funds, the format, content and length of the PDS will be heavily prescribed.
However, for those financial products where issuer and industry information is critical, such as equity IPOs, it is expected that there will be greater flexibility around length and content, with the primary emphasis on effective presentation of material information.
Mighty River Power breaks new ground
Mighty River Power (MRP) was the first Government privatisation in over a decade and widespread New Zealand public participation was encouraged. The Government set a target of between 85 and 90% New Zealand ownership and offered incentives for the general public or “mum and dad” investors to participate, helping to renew interest in capital market investment across the country.
The procedures implemented in the MRP IPO have since been replicated in other IPOs. The MRP IPO also highlighted a number of recent equity capital market trends, which are likely to continue, at least until the Financial Markets Conduct Act comes into force.
In a market first, an exemption was granted which enabled the Crown and MRP to issue a supplementary disclosure document during the offer period if a significant event occurred, instead of re-issuing the offer document as a whole. When the major New Zealand opposition political parties announced plans for industry reforms the implementation of which would have a potentially material adverse impact on MRP, the supplementary disclosure process was utilised. The process gave applicants a five day window to withdraw their application and avoided the need to send revised offer documents to the thousands of investors who had already applied.
Z Energy obtained a similar exemption for its IPO, although did not need to utilise it, and Meridian has also been granted the same exemption.
Under the Financial Markets Conduct Act, a supplementary disclosure regime will be hard wired into the statute. However, making supplementary disclosure will trigger a one-month withdrawal period. Due to this lengthy withdrawal period, issuers may still seek similar exemptions to MRP and Z Energy for equity IPOs, as a one month withdrawal period will not be practical for most large scale IPOs.
The MRP offer document had to be developed in line with new effective disclosure guidelines published by the FMA. Although not the first document to be published within these guidelines, the complexity of the IPO was magnified because of the Crown involvement and the high retail participation objective. The offer document used innovative navigational tools to aid with readability. Z Energy, Synlait and Meridian have since used similar formats and navigational tools in their offer documents.
As with a number of other recent listings, MRP was listed on the ASX as well as the NZX Main Board. Although listing on the ASX incurs extra listing fees and expenses and requires further compliance by issuers, it improves access to Australia’s broader pool of capital. The majority of Australian institutional investors require New Zealand companies to be dual listed for inclusion in their investment portfolios.
Other recent dual listings include the Fonterra Shareholders’ Fund, Trade Me and Z Energy. Summerset did not dual list upon IPO but has recently been granted an ASX listing. NZX listed Metlifecare has also applied to list on the ASX and EBOS has signalled it is not far behind. We expect other NZX Main Board issuers to consider ASX listing, as ASX has actively been marketing in New Zealand.
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 examples of where the mutual recognition regime has been used include Fonterra, MRP and Z Energy.
Mutual recognition allows issuers to meet demand from Australian institutions without imposing restrictions on those institutions’ ability to freely trade shares post IPO under Australian law.
The mutual recognition regime will need to be amended to reflect the Financial Markets Conduct Act in due course, but the Ministry of Business, Innovation & Employment has indicated that it expects any changes to be consequential only.
There are a number of announced IPOs still to come to market. Meridian shares will commence trading on 29 October and the Genesis IPO is expected in the first quarter of 2014. Meridian is the biggest of New Zealand’s ‘gentailers’ with a potential offer size of $3 billion. The offer is being made with an instalment receipt structure to defer payment of 40% of the offer price for 18 months.
There are, undoubtedly, other IPOs that have yet to be announced. Tim Bennett has talked about his desire to line up five or six medium-sized companies to list on the NZX next year to keep the IPO pipeline going.
NZX is close to launching its equity derivatives market and will also finalise a new growth market by the end of the year to begin trading in 2014.