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Kick off: The NCM gets off to a hiss

Tuesday 2nd May 2000

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By Nick Stride

The scoffers would have been sorely disappointed.

As our beleaguered Stock Exchange opened its New Capital Market (NCM) for business to one-and-a-half cheers at best from observers, a hitherto obscure Otaki firm announced it would be the first to seek a listing.

It should have been an Internet start-up run by a 19-year-old with a ponytail and a goatee beard. Instead we got Mowbray Collectables, a company with a lengthy track record, a solid, almost Victorian business auctioneering and trading in stamps and rare books, and an experienced boss with coherent expansion plans.

And a sexy Internet angle, too. Principal John Mowbray says the revenue from online auctions has grown from 5% to 20% in the past year and could easily go as high as 40%.

True, one company does not a market make. Competing for the number-one listing spot is E-Opportunity, a so-far totally unknown Internet player. But Mowbray Collectables seems the perfect antidote to many of the worries the NCM has attracted even before it gets going.

Critics have warned the market's reverse-takeover structure, by which NCM entrepreneurs raise money through a listed shell and then use it to find a business to buy, will have callow punters investing in reputations, not business fundamentals.

What's more, one commentator wrote, "Joe and Jane Punter will be fobbed off with the dross - the bigger risks, the lower returns - while the 'wealthy and experienced' investors continue to pick from the premium proposals given them by highly selective venture capital firms."

Critics argue the new market's disclosure rules, less onerous than for a main board listing, will result in uninformed investment decisions and encourage insider trading. Trading in these tiny-cap minnows will be so illiquid that investors will have a hard time getting out if something goes wrong.

All hell, in other words, is about to break loose.

Joe Blow the winner today
The Stock Exchange, unsurprisingly, disagrees. It's not about offering the dregs the venture capital companies (VCs) won't touch, argues Greg Harris, the Canadian who designed the new market. On the contrary, it will enable "Joe Blow" investors of modest means to participate in listings previously reserved for VCs and their well-heeled clients. Share brokers, for instance, can create miniature VC funds in the shape of a "pure NCM" company and wait for the right business to come knocking.

Before the NCM, smaller firms needing capital had to find an "angel investor" prepared to inject a single large capital lump. But many of them, Harris says, don't want to deal with VCs because VC terms are too onerous. Nor do they need as much money - $5 million or more - as VCs typically like to invest.

Harris also rejects the liquidity argument. The NCM, he says, will deliver "a true market" because trading and price information will be on brokers' screens and in newspapers. That alone will ensure greater liquidity than companies quoted on the informal inter-broker market attract.

Back in Canada
As for small investors losing their shirts, nobody doubts there will be horror stories. Even so, the Alberta Junior Capital Pool (JCP), on which the NCM is based, has worked well in Canada.

"There were some problems at the very beginning that required some regulatory fine-tuning," says Geoffrey Scotton, a business writer for the Calgary Herald. "But it's recognised as a very good programme for start-ups to raise capital, and the mechanism is certainly popular amongst investors in Calgary."

Research done a few years ago by the University of Calgary suggested JCP companies tended to provide "fairly lucrative" returns to those who became involved at the earlier stages.

Most observers believe it can work here, too. But will it be the saviour of the New Zealand Stock Exchange?

The exchange will consider a main board listing for NCM companies once their market value reaches $10 million. But it will take a lot of $10 million listings to replace Fletcher Challenge Paper, let alone the other three Fletcher divisions, all up for sale.

Top companies with major overseas shareholders who might want 100% include Carter Holt Harvey, Contact Energy, INL and Lion Nathan.

Wellington-based venture capitalist Jenny Morel reckons the Stock Exchange has aimed its new capital-raising mechanism at the wrong tier of business. "The problems are not in the under $5 million end of the market but in the mid-range listings of companies that are going to grow."

Morel says she can't think of any recent listings in the $30 million to $50 million range that have the potential to grow into the really big companies that will reinvigorate the NZSE40 index.

Ord Minnett's Arthur Lim acknowledges there's a long way to go but says we have to start somewhere. "A journey of a thousand miles, as they say, starts with a single step."

The market's success with investors will depend on the quality of the promoters who use it, and on the track record of NCM companies for delivering results as the market develops.

Baycorp and The Warehouse, he says, were both small companies five years ago. "The NCM is an attempt to tap into that potential."

Direct Capital's Ross George agrees. "New Zealand is never going to have good, big companies. For us in New Zealand, if it's worked well in Alberta it will probably work here too."

So, three cheers for Mowbray Collectables. It may never be Microsoft, but it's growing, and it's ours.

Nick Stride is a regular contributor to Unlimited



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