As we enter into May, we also cross the 24-month mark for New Zealand’s IPO drought.
The last Initial Public Offering (IPO) was Oceania Healthcare [NZX:OCA], which listed on 5 May, 2017.
That’s a long time for a major exchange without any new blood…
And it might lead some to believe that New Zealand’s market is dying…but it isn’t. We’re seeing start-up after start-up being acquired by big overseas fish or venture capital firms.
In other words, there are big things coming out of New Zealand…they’re just not bothering with the NZX.
Why is that? What’s killing New Zealand’s stock market?
There are a few issues discouraging new growth…but let me start with the most fundamental obstacle — money.
You see, new companies list on an exchange for one reason — more money. They need capital to grow, so they invite investors to buy slices of their company pie. Those slices of pie are called shares.
The problem is that the NZX is expensive for companies to list on.
According to the NZX fee calculator, a company with about a $100m market cap would pay about $100k to list, then another $50k for its annual fee, then another $50k for other fees.
In contrast, the NASDAQ charges roughly half of that…even with the exchange rate considered.
But fees are only the tip of the iceberg…there are tens of thousands of dollars in costs for governance, investor relations, audit, and legal oversight requirements.
If you’re a company that’s teetering on the edge of break-even, you’re going to be inclined to avoid hundreds of thousands of dollars in compliance costs…
At the same time, the emerging venture capital market allows for companies to raise investments at much lower costs and with far less documentation required.
It makes the decision to list on the NZX much harder for growing businesses.
While all of this is happening on the company side, investors are feeling the squeeze too…facing sky-high brokerage costs. For example, you’d be pretty lucky to pay $30 for a single trade here in NZ, whereas I pay US$7 per trade with my American brokerage account.
When it’s that expensive to buy and sell shares, investors are discouraged to trade.
So what do they do? They either avoid stock investing altogether…or they shift to low-cost passive investing through indexes and funds.
But there’s a problem there too.
Large funds tend to ignore smaller companies on an exchange. There’s simply too little equity available to be worth the attention…so fund managers look to larger companies instead.
When that happens at scale, as it does here in New Zealand, the small to mid-cap companies on the exchange find it harder to attract new capital. They depend on the odd retail investor to throw some cash at them.
That compounds the original issue here — money. These smaller businesses are listing in order to attract investment dollars so they can grow…and they’re paying a hefty premium to the NZX to do so.
When they discover that there’s not much investment flowing into businesses their size, they’ll look to dual-list or delist…which is what we’ve consistently experienced over the past few years.
Then, on top of all of these negative pressures, there’s the problematic culture of property investment to contend with… [openx slug=inpost]
Where other high-income nations enjoy the benefit of savings flowing into stocks, that doesn’t happen as much here. Instead, folks save up for a house…then a bach…then a rental property…etc. It means a lot of Kiwi wealth is tied up in property — dollars that could have otherwise been injected into the stock market.
The main exception to this statement, of course, is KiwiSaver…but very few KiwiSaver funds look at small or mid-cap companies…they’re just too small to make a dent.
So you get a downward spiral — too expensive to list, too expensive to invest, and too few eyes on the small end of the exchange. This causes the NZX to lose economies of scale, which turns into higher fees. High brokerage fees discourage individual investors, and those investors move to passive funds, who in turn ignore the small-cap market.
But, fortunately, there are a few solutions that could knock our stock exchange out of this losing rut…
The first and simplest is cutting fees and compliance demands on listed companies.
That’s something that shareholders in the company NZX Ltd [NZX:NZX] understand and are calling for. In recent months, the NZX has faced increased criticism by investors for its poor performance as a business and as an exchange.
But to afford fee cuts, the NZX will have to heavily reform its business, cutting staff and operations costs. A hard ask…
On the other end, something needs to happen to break up the high-cost monopoly of Kiwi brokerages.
I don’t know enough about the brokerage industry to say exactly what that is…but something needs to happen.
$30 a trade? Ridiculous!
Perhaps change comes through new competition. New low-cost platforms for individual investors. But with the NZX being so small (and shrinking), I can see why there aren’t many competitors interested in joining the fray.
Or perhaps regulation reform in the FMA could remove obstacles to entry for new brokerages…
In any case, the investing world is too darn expensive for investors and companies alike. Make it cheaper, and it could turn the tide…
At the same time, investors lack access to the research and education needed to make smart investing decisions. Most of the advice you find these days comes from biased sources like fund managers or media sources with strong ties to the property market. So it’s no surprise that Kiwis tend to invest in funds or property — those are the options they’ve been given.
The sad result is the erosion of the local stock market, starting with the foundation of growth — small, growing companies.
If New Zealand wants that trend to reverse, it needs better service from the NZX, improved regulation across the board and an improved culture of financial education for all Kiwi investors.
Otherwise, we’ll be resigned to watching our top talent and most promising start-ups sail away…
Editor, Money Morning New Zealand
PS: For additional reading on the NZX IPO drought…and why the ASX seems to steal our thunder, check out this opinion piece by Brian Gaynor in the NZ Herald. He makes a few really interesting points about how the NZX is failing to keep up with its trans-Tasman peer.