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Opinion: NZX needs to accept problem, so it can be fixed

By Simon Louisson of NZPA

Friday 2nd November 2007

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When Opus Consultants listed on the stock exchange this week, NZX chief executive Mark Weldon charged me with negativity when I asked why there had been so few IPOs this year.

Opus was just the third NZ listing this year, if you ignore the listing of unit funds like Fisher Fund's Marlin Global which listed yesterday, after coal miner Pike River and software company, Xero.

There were no Initial Public Offerings (IPOs) in the first half of the year. That's zero, not Xero.

So with Opus's $48m, we have had the grand total of $148m raised in IPOs (excluding the mutual funds).

This is not a recent trend. If New York based software company Diligent Boardbooks lists before year end, the four listings will surpass the pitiful three of 2005, which included Australian company Goodman Fielder. That year at least had heavyweight Vector, but also included the lightweight Allied Workforce.

Weldon accused me of having an obsession about the lack of listings. Obsession isn't the word I'd use, but in a way he's right. I have been on about it for a number of years and I make no apology I have often raised the issue.

It's important. While a stock exchange's main function is to facilitate share trading, close behind that should be its role as a vehicle to raise new capital.

It is vital for entrepreneurs to get access to capital. Without that, the economy will grow below potential, affecting the wealth of everyone.

Weldon argues NZX has raised far more capital via debt issues. But it is through the medium of equity that investors are able to fully participate in the wealth creation ventures and other countries seem to manage both forms of capital raising.

To put the lack of IPOs here into context, compare it to the Australian exchange. In the year to date, 230 companies have listed -- raising $A15 billion ($NZ18.3 billion). Last year, 244 companies raised $A27 billion and in 2005, 232 companies raised $A22.5 billion.

Australia, partly thanks to its compulsory superannuation, has been one of the most active IPO markets in the world in the 2000s. But this is not a case of New Zealand being a couple of notches down from the A league, we are squatting in the X Y or Z league.

Coupled with the lack of new listings, an active merger market fuelled by private equity has seen a plethora of companies delist. Toll NZ, MediaWorks, Carter Holt Harvey, Waste Management, Gullivers Travels, Independent Newspapers, Ports of Auckland, NGC, Capital Properties... and the list goes on.

At the Opus function, Weldon blamed market volatility for the dearth of IPOs this year, saying no one expected it.

"IPOs around the world got pulled and we saw that here with Summerset and ING Properties and a few others as there was a high degree of uncertainty in the market."

That volatility didn't seem to slow the activity in Australia.

And as Opus chairman Basil Logan pointed out, if a company comes to market with a quality product, investors will look through the short-term issue of market volatility.

Critics such as myself have questioned NZX's quest to make bigger profits as partly responsible for the exchange taking its eye off the ball off promoting new listings. Since transformation from a mutual to a listed company in 2003, a conflict was established between the corporate rationale to maximise profits and the wider purpose of promoting a capital formation. Still, that conflict has not seemed to hamper the ASX.

Weldon argues without financial health, NZX would never have been able to invest $6m in a new trading system as it recently has.

What may be more questionable is the company's diversion into ventures such as news and the like.

NZX makes more and more from selling its information while it seems fewer and fewer investors bother to access that information because the fees charged make it less accessible and there are fewer companies to follow.

NZX may become like TVNZ which had the dual purpose of maximising profits while trying to be a public broadcaster. The state broadcaster has this year failed its profit function mainly because it so compromised on product quality few people want to watch any more.

Last year, Weldon saw hope in the government decision to allow state-owned enterprises to float parts of their business and the possible partial listing of Fonterra's $10 billion business.

"Those are the sorts of things for a small market like ours would really quickly turn it around," he said late last year.

He forecast more property trusts, "a decent chunk of technology companies", two exporters and agricultural sector firms to list.

Most of these have not eventuated.

Last year Weldon blamed the lack of IPOs on concerns about the exchange rate, possible hard economic landings and even the bustle of merger and acquisition activity that is consuming the time of a limited pool of merchant bankers.

Weldon is ignoring the fact New Zealand has been experiencing one of the strongest periods of sustained economic growth in its history -- an environment that should be very conducive to IPOs.

The problem comes down to two things -- the lack of capital in New Zealand, exacerbated by New Zealand's poor savings record, and New Zealanders' lack of trust in shares.

The latter primarily stems from the sharemarket crash 20 years ago which badly burnt most mum and dad investors and exposed a series of shonky practices in the sharemarket.

Since taking over NZX in 2002, Weldon has been active setting right the vehicle that allowed those practices to prevail.

Before floating in 2003, the exchange pushed through a raft of reforms including continuous disclosure and new listing rules.

NZX has also supported the Government in pushing through a raft of securities laws from the new takeover code to insider trading.

The Feltex fiasco set the trust issue back severely.

But probably the biggest issue is the country's failure to generate savings, an issue beyond NZX control.

A world competitiveness survey this week showed New Zealand came 108th out of 131 countries on saving. It's a moot point whether KiwiSaver will address this, but compulsory pensions seem to have made a significant difference in Australia and Singapore.

Recently passed new rules covering the tax of portfolio investment entities (PIEs) should also help.

Weldon has commendably supported KiwiSaver and even supported a capital gains tax, something our politicians have been too gutless to touch.

While no organisation likes to focus on its weak spots, NZX has to acknowledge the problem before it can tackle it. It's time Weldon and NZX talked about the issue openly and not defensively.

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