Can SMEs save the NZX?

18:31, Dec 11 2012
The NZX plans a drive to recruit small businesses to bolster its growth.

If Tim Bennett had a gun, it wouldn’t be firing silver bullets. 

The exchange plots to enlist more small Kiwi companies to reinvigorate interest in going public. They’d be a much needed boost. In the past five years delistings number 60 while only 28 firms have listed.

After several months consulting businesses and industry players, Bennett sees plenty of SME prospects, though admits they could take a couple of years to get ready. He won’t set a target SME number, but says of the campaign, “We need to get going”.

But as the NZX strategises, potential pitfalls abound. We’re more interested in buying and selling property than shares and for some business owners, staying private can be simpler and less costly — and shut out people who might interfere with their vision. “New Zealanders have really turned against the sharemarket over the last 10 to 15 years; there’s a lower level of interest,” says commentator Brian Gaynor, head of investment analysis and portfolio management at Milford Asset Management.

“The momentum is changing slightly, but most New Zealanders think businessmen are crooks and they’re going to be ripped off. The finance company debacle had a huge negative impact on people. All the headlines say property is great and anything to do with companies and directors is bad.”

Still, there’s hope from the likes of the New Zealand Venture Investment Fund (NZVIF), which hopes to float about 15% of its 125-strong portfolio of companies.


“We need to work with the investment and brokering community on building the pipeline of prospective listings and create the runway from early stage private investment to NZX listings,” says NZVIF chief executive Franceska Banga. “We need more analyst capability focused on understanding the nature of technology companies with high growth prospects.” 

These days, fast food chain Burger Fuel is on the up. It announced a $708,000 profit after tax for the year to March and is charging into the Middle East, but its 2007 IPO could have halted its growth journey.

The company didn’t use brokers — it sold shares in stores and via credit card payment — and fully funded its NZAX listing (including marketing costs) to the tune of about $1.3 million. It aimed to raise $15 million, but CEO Josef Roberts was forced to make up the shortfall to the minimum subscription of $8 million.

Media criticism was scathing and Roberts believes many wrote the company off. He warns going public isn’t for the faint hearted, but says the company is stronger for the listing process.

“We have a better company, more professional, higher levels of governance and everything we do is now more balanced and considered.”

So does he think the NZX’s strategy has legs? That could depend on how good our entrepreneurs really are.

“There is no doubting the success of some of New Zealand’s publicly listed companies that have been purchased. High growth stocks can create excitement and profit — if they succeed — and that’s attractive to investment funds. Young companies will always struggle to get backing and so they should — many startups or early stage companies just don’t have what it takes. It’s up to the entrepreneurs to do their jobs properly. Detail is everything and a lot of people don’t get that.”

Few would doubt Geoff Ross’ entrepreneurial credentials and his IPO track record is well established. He took vodka venture 42 Below from garage startup to the sharemarket in 2003, then followed suit with luxury candle maker Ecoya in 2010.

Now he’s at it again with craft beer brand Moa. Companies need a solid and compelling story to get payback, says Ross. “You need to be able to articulate the growth opportunity and exactly what the investment proposition is. You need a solid team at board and management level; you can’t list on the reputation of one or two individuals.

“42 Below was very early stage; Ecoya was up and running and had a strong trajectory and financial structure in place that could be easily understood. You don’t necessarily have to have 10 years of financials, but if you’re not a large company you need to have a very steep growth trajectory and there needs to be evidence of that, that can’t just be your forecast, that needs to be seen.”

Listing was fundamental to Xero founder Rod Drury’s plan to build the cloud accounting software company. Now an NZX board member, he’s been giving SMEs master classes on how to list. 

“[Listing has] been a very good thing for us. It’s given us the resources to be successful and we’ve created 270 new jobs over the last five to six years. You have to be pretty thick skinned, but it’s also good fun building a public company and a global team.”

Gaynor reckons we need more like Drury and Ross if the NZX’s SME recruitment drive is to get traction. 

“The stock exchange can do its best to try to convince people to buy into smaller companies, but it just takes more successes.” And many issuers just don’t have the communication skills of a Drury or a Ross, says Gaynor.

He says chief executives should spend at least 15% of their time on investor relations, but some spend none. “They fail to promote themselves after they’ve listed and they’re very poor at communicating with shareholders and the market in general. A lot of listed companies make no effort whatsoever. They hold annual meetings at times and in locations that it’s almost impossible for people to get to. Some companies say if they communicate it gives competitors information they can use against them. We find that appalling because if you’re good it doesn’t matter what you disclose. It’s a very New Zealand attitude — you never hear that offshore.

“It amazes me the amount of people who are trying to extract the highest price at the IPO price without realising that if you own shares the after listing price is the key. There’s a lot of naivete out there.” 

The NZX has a vast hunting ground. According to the Capital Market Taskforce’s 2010 report, hundreds of thousands of the companies with less than $5 million in revenue were private, 18 had listed on the NZX and 12 were on the ASX.

Of those with between $5 million and $10 million revenue, between 10,000 and 20,000 were private, four were on the NZX and two on the ASX. You might think emerging companies in the fast-growing tech sector would be prime targets, but Greg Shanahan, publisher of the annual Technology Investment Network (TIN) 100 list, thinks going public isn’t necessarily their best option.

“It’s difficult to be in high tech manufacturing without some element of risk and investing in R&D where it might be needed. That’s more difficult in a public company because you have a more diverse shareholding that is in that company for all sorts of reasons.”

Bennett knows he’s in for a long game. The NZX is waiting for the Financial Markets Conduct Bill to become law. It aims to promote informed participation in the sharemarket by businesses and minimise unnecessary compliance costs.

The Commerce Select Committee considered what an alternative, lightly regulated market might look like and how companies might move between markets.

A committee briefing report earlier this year acknowledged some SMEs find current NZX compliance costs too high, adding stepping stone markets could be an intermediate step to listing on a fully regulated market.

Bennett acknowledges the NZAX, launched with fanfare in 2003 with the aim of lightening the regulatory burden for smaller-cap companies, hasn’t served its purpose partly because the regulatory environment and the costs of that board are almost the same as the main board. He adds the NZX is considering a new alternative.

“The government has been quite vocal about using listing as an opportunity for small and mid-size companies to raise capital and you see New Zealanders starting to save and invest more through KiwiSaver, so the money is out there.

But in all these things there are some obstacles. The listing process is perceived as quite expensive and complex. We’re working with the industry to change that perception.”