New Analysis Reveals Intangible Assets Will Drive Growth For NZX Companies Post-pandemic

New research from intangible asset specialist EverEdge highlights the relationship between intangible assets (such as data, brand, confidential information, patents, design rights, systems and processes, and relationships) and business growth and value – a trend that is set to continue as digitisation accelerates in post-pandemic economies.

Commenting on the research, EverEdge Global CEO, Paul Adams said: “This research affirms that intangible assets are the most important drivers of company growth and value today.

“Over the twenty years of the study, the data shows how capital has (consciously or unconsciously) actively and disproportionately rewarded intangible asset-rich companies. It has done so because, other things being equal, companies that are able to harness the inherent scalability and differentiation of intangible assets to growth orientated business models will generate outsized performance.”

The EverEdge Intangible Benchmarking Index™ (EIBI) tracks the evolution of intangible assets at both an index and sector level across four major stock indices – S&P 500, S&P ASX 200, FTSE ST All-Share Index (FSTAS) and S&P NZX All Index between approximately 2000 and 2020. It is the first report to analyse the evolution of intangible assets as drivers of company value for Global Industry Classification Standard (GICS) sectors in the Singapore, Australia, and New Zealand indices.

The EIBI™ was developed to address a gap in existing benchmarks, which have traditionally focused on the increase in intangible assets as a proportion of market capitalisation. However, focusing solely on this metric risks conflating operating performance and financing choices. To neutralise the effect of financing choices, EverEdge has deliberately expressed intangible assets as a proportion of a company’s enterprise value instead of market capitalisation, which provides a more accurate measure of the capital required for any business because it includes the debt the company takes on to finance its activities.

Adams added “Expressing intangible assets as a proportion of enterprise value yields a lower and slower-moving number than if it was compared to equity. However, it is a more robust expression of the importance of intangible assets for company valuations and deliberately and perceptibly neutralises the effect of financing choices. This allows for better analysis of a company’s strategic position and management’s build-up of intangible assets.

“For a long time, analysts, auditors, and CFOs have independently estimated the value of intangible assets without the benefit of robust benchmarks, but they now have a resource that fills that gap. Our research delivers an in-depth analysis based on reported, vetted, and carefully analysed data of intangible assets across four major capital markets and more than 800 companies. The EverEdge Intangible Benchmarking Index™ will become an important tool as companies and markets continue to evolve in a post-pandemic economy.”

Findings from EverEdge Intangible Benchmark Index

Index analysis

The S&P 500 recorded the highest proportion (85% in 2020) of intangible assets relative to enterprise value and has seen the steady growth of intangible assets as a percentage of enterprise value from 2000 to 2020. In New Zealand and Australia, analysis of the S&P NZX All Index and the S&P ASX 200 revealed a consistent rise in the proportion of intangible assets over 15 years. However, in Singapore the FTSE ST All-share Index showed a significant decline in intangible assets as a proportion of enterprise value over the past decade, due in part to a change in the mix of companies listed in Singapore and a substantial number of de-listings over the period.

Analysis also showed that growth in intangible assets as a proportion of Enterprise Value for S&P 500 accelerated over the last five years. This is mirrored by the S&P NZX All Index and S&P ASX 200 indices.

The findings from the EIBI™ confirm EverEdge’s observations from more than 2,000 client engagements over 14 years. “Companies that identify their intangible assets and monetise them via scalable business models tend to outperform those that don’t and are able to command superior enterprise values from external investors or acquirers,” says Adams. “Consequently, these intangible asset rich companies attract more capital and thereby better perform their ultimate function of increasing shareholder value.”

“The S&P NZX All Index has shown a consistent rise in intangible asset value as a function of enterprise value over the last decade. From a low base, all sectors exhibited a consistent rise in the ratio throughout the period of the study,” says Craig Margolius, Head of Transactions, EverEdge. “This comes on the back of growth in the Health Care and Utilities sectors, led predominantly by Fisher & Paykel Healthcare, Meridian Energy and Mercury New Zealand.

“The research highlights that New Zealand companies that focus on building, leveraging, and protecting their intangible assets, along with articulating their value to consumers and investors alike, are increasingly rewarded with disproportionate growth in investor capital allocation.”

Sector analysis

Within sectors, the share of intangibles as a proportion of enterprise value has been increasing in most sectors, reflecting the shifting characteristics of businesses. In some sectors, such as Information Technology, it has nearly reached its theoretical maximum of 100%. Within markets, the persistent outperformance of sectors with high intangible assets has led to a shift in the composition of the indices, driving up the aggregate proportion of intangible assets as a proportion of enterprise value.

The EverEdge Intangible Benchmark Index™ is available for download here.

Please find below

Annex A - Summary of key findings from the EverEdge Intangible Benchmark Index for New Zealand.

• Annex B – Selection of quotes on the research findings from leading industry commentators.

About EverEdge Global

EverEdge Global is a global intangible asset advisory, valuation, and transaction specialist. Intangible assets such as data, content, software, brands, confidential information, patents, trademarks, internet assets, and designs are the most important assets companies today own.

However, these assets are frequently under-reported on company balance sheets, creating or hiding major risks and opportunities. This is a significant problem for management, boards, and investors because intangible assets represent up to 85% of enterprise value and are the primary drivers of company performance today. EverEdge fixes this problem: we identify, assess value, and monetize these assets.

Founded in 2007, EverEdge was the first company to specialise in providing advisory and transaction services focussed solely on intangible assets. It’s track record of more than 2,000 completed client engagements span the full spectrum of business sizes, stages, and industries: from Fortune 100 corporations to major investors, national governments, research institutes and ambitious start-ups. Serving clients across the United States, Europe, Asia, and Australasia, EverEdge provides international reach and deep technical and commercial experience around the globe.

To find out more about EverEdge, please visit www.everedgeglobal.com

EverEdge

Annex A: Summary of key findings from the EverEdge Intangible Benchmark Index™ for New Zealand

• The S&P NZX All Index has shown a consistent rise in intangible asset value as a function of enterprise value from 2002 to 2020, at 45% to 63% respectively.
• There was a noticeable tail effect from the 2007 global financial crisis that continued to affect the weighting in 2010. The timing of this recognition lagged some of the other markets; however, the consistent rise shows that at least a limited pool of capital within the market has pursued intangible asset-rich companies.
• Compared to other indices studied, the S&P/NZX All Index’s level in the contribution of intangible assets to enterprise value has risen to new highs on the back of growth in Health Care, led predominantly Fisher & Paykel Healthcare, and Utilities sectors, led by growth achieved by Meridian Energy and Mercury New Zealand.
• The sectors with the highest and lowest levels of Intangible assets as a percentage of enterprise value from 2002 to 2020 are:

• The proportion of intangible assets within NZX-listed companies’ enterprise values has become more prominent in all eleven sectors with the exception of the Consumer Discretionary sector (65% in 2002 to 60% in 2020).
• The Utilities and Industrial sectors combined have grown from 28% in 2002 to over 44% of the total enterprise value of the index in 2020, with the percentage of intangibles in the Utilities sector reaching 58% in 2020 (up from 14% in 2002).
• The narrowness of the NZX All Share Index causes it to be susceptible to rapid and dramatic change. Reliance on a small number of intangible asset-rich companies to drive the index highlights the potential for volatility. It is noted that the market has exhibited a willingness to continue to support high-growth companies.
• The New Zealand market has a limited pool of capital directed to intangible asset-rich companies and is capable of keeping some of these companies on shore at least for a period. This highlights that these and other companies that focus on building, leveraging, and protecting their intangible assets, along with articulating their value to consumers and investors alike, are increasingly rewarded with disproportionate growth in investor capital allocation.

Annex B: Selection of quotes relating to research findings from key industry commentators

“It is well established in recent decades that equity investors value business based on earnings/potential earnings and on the capability of assets of any kind to generate and maintain earnings. Whether those assets are ‘tangible’ or ‘intangible’ is not a great concern - they either perform the value enhancing function or not. As the opportunities for value enhancement have shifted for many activities away from fixed assets increasing proportions of value accrue to ‘intangibles’. This research maps that for a variety of equity capital markets. This is simply a rational shift from what counts for less to what counts for more. Not just investors but also managers and boards need to ‘follow the money’ and think this way too.”

Rob Campbell (CNZM) Chair of Health NZ, SKYCITY Entertainment Group, NZ Rural Land Co, WEL Group Ltd, Tourism Holdings Limited, Ara Ake; Chancellor of Auckland University of Technology, Owner of Tutanekai Investments

“Forty years ago, banks and other financial institutions could largely ignore intangible assets. Not so today. In a truly digitised economy, it is now essential for capital providers to understand both the value of intangibles and the criteria by which to lend against them. This is no short-term trend: as capital flows increase and intangibles continue to represent an ever greater share of company value understanding and managing intangible assets is now mission critical.”

Chandu Bhindi, Treasurer, ASB Bank

“Historically physical assets have been the main driver behind the value; however, we now live in an age where digital or intangible assets have proven to be more valuable. Banks generally lend money on cash flow and assets, never taking into consideration the intangible asset that might have less risk or could be sold more than once should things go wrong.

“Companies that truly understand their digital footprint and intangible assets have thrived over the last few decades. Would a bank lend Coca-Cola a billion dollars if they were not willing to put up any physical assets, of course, would the brand be the asset?

“With the world in lockdown, companies will need to be very clear on their digital narrative and how the intangible part of the business adds value, how to leverage it and commercialise it. A great example of this is NFTs, you only need to look at Open Sea to see the huge demand for art in a digital context. The world is changing, it's time to look at things differently.”

James Brown, General Manager, FinTechNZ (Former)

“This work is timely in view of enterprise value, including intangible assets, being central to the concept of ‘sustainability’ being embraced by the IFRS Foundation and IOSCO as they work to create the new International Sustainability Reporting Standards Board. The initial focus is on a climate reporting standard, with further work on broader ESG matters. It is essential that the ISSB also focuses from Day 1 on intangibles as a major component of enterprise value. This work focused on intangibles and enterprise value is closely aligned to the where the foundation of corporate reporting is moving which will assist investors with their work on how they perceive and place value on intangible assets.”

Professor Peter Carey, Director – Research, Deakin University Integrated Reporting Centre

Michael Bray, Professor of Practice (Integrated Reporting), Deakin University Integrated Reporting Centre

“In my mind, what regulatory bodies refer to as non-financial risks are the those associated with intangible assets. With the increasing dominance of intangible assets as driver of enterprise value, it is becoming more important that the full spectrum of non-financial risks are properly measured, mitigated and monitored by organisations.”

Elaine Collins, Non-Executive Director of Zurich, rthealth, ARPC, ANZLMI; Professor of Practice UNSW

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