NZX Says Local Authorities Should Look at Selling Assets

Now that Parliament has passed the mix ownership legislation the NZX CEO wants local authorities to look at assets that could be sold the same way.

Speaking this weekend on TV3’s “The Nation”, Tim Bennett, NZX CEO said he was going to work to provide New Zealanders more opportunities to invest than just power companies.

There are some other sectors of the economy, those assets that are in public ownership, particularly by local authorities where we need to think reasonably creatively about how New Zealanders can share in the ownership of those assets while still maintaining control,” he said.

He said Christchurch airport was an example of what he was talking about.
“I think the mixed ownership model provides a good template of how these things should be done. 

“You look at the Ports of Tauranga as another example where local authority maintains a major stake in these assets, and also allows New Zealanders to invest alongside the local authorities in parts of our infrastructure.

Mr Bennett said he had not yet talked to local authorities about his proposal.

Instead in the two months he had been in the job he had been concentrating on talking to fund managers and brokers.

“There's tremendous support for the New Zealand capital markets, but there's a clear demand for different types of investment opportunities for New Zealanders to invest in the market. 

“And one of the things we need to work on is across that range of different opportunities.”

'THE NATION'

TIM BENNETT & BRIAN GAYNOR

With RACHEL SMALLEY

Rachel I'd like to welcome to the programme Brian Gaynor, Executive Director of Milford Asset Management, and in Wellington we have Tim Bennett, the New Zealand Chief Executive of the New Zealand Stock Exchange. Thanks to both of you for joining us. The first question I think I can put to you Tim. The government clearly thinks that our Stock Exchange can be doing more if you like to contribute to the country's economic growth. Do you think the mixed ownership model is going to be you know something of a silver bullet?

Tim Bennett – NZX Chief Executive
I don’t think it's going to be a silver bullet. The mixed ownership model provides an opportunity for New Zealanders to own New Zealand assets, but it's only a starting point. I think we need to do more both as NZX and the markets in terms of providing more opportunities beyond the power companies for New Zealanders to own New Zealand assets, and we'll be working with the market next year to look at some of those opportunities.

Rachel Alright Brian Gaynor if I can bring you in here. There's an interesting statistic that less than a third of our 200 largest companies are listed. And when you measure that relative to the GDP I think it makes our NZX among the smallest in the developed world. Why is that do you think?

Brian Gaynor – Milford Asset Management
Yeah that’s right and it's been a major disappointment to people like myself, because I think that share markets should be much bigger and they do play a vital role in the economy. There's no simple reason, there's a combination of different things. Somehow New Zealanders, both businesses and investors have lost confidence in the share market. 1987 crash had an influence I know it's a long time ago, but it did really tar one generation and stop them investing in the stock market. There's been a few bad experiences with companies since. I think the privatisation and asset sale process 20 years ago was very flawed, and the latest one I think is going to be much much better. So I think it will help renew confidence in the market, but I don’t think it's a silver bullet, I think there's an awful lot of other things have to happen as well.

Rachel Right Tim you mentioned that you would be working at providing some other opportunities. Where might some of those opportunities be?

Tim Well if you look at the sectors in our economy that are not well represented in our equity market at the moment, obviously the agricultural sector, one of the biggest sectors in our economy, trading amongst farmers will provide an opportunity for New Zealanders to invest in units where their returns will be linked to Fonterra's returns globally. So that’s one opportunity. There's also smaller medium size business which are under represented in New Zealand's equity market, and there's clearly some opportunity for us to reinvigorate that part of the market. And finally there are some other sectors of the economy, those assets that are in public ownership, particularly by local authorities where we need to think reasonably creatively about how New Zealanders can share in the ownership of those assets while still maintaining control.

Rachel Okay you're talking about local assets, I assume probably you're speaking about the likes of Christchurch Airport there Tim?

Tim Yes exactly.

Rachel Would you think that they should be perhaps looking at the mixed ownership model as well, the Christchurch City Council?

Tim Well I think the mixed ownership model provides a good template of how these things should be done. You look at the Ports of Tauranga as another example where local authority maintains major stake in these assets, and also allows New Zealanders to invest alongside the local authorities in parts of our infrastructure.

Rachel Have you yourself talked to any local authorities about the partial sale of assets?

Tim No I have not. I've only been in those role for the last couple of months, and I've spent those two months talking to a lot of stakeholders within the market. I've talked to our issuers, I've talked to our fund managers, talked to the brokers, and there's tremendous support for the New Zealand capital markets, but as Brian said there's a clear demand for different types of investment opportunities for New Zealanders to invest in the market. And one of the things we need to work on is across those range of different opportunities. As I said the agricultural sector, small and medium size businesses, and with other large asset owners to allow New Zealanders to invest in these businesses.

Rachel Talking about diversifying there and agriculture, what do you think about this trading among farmers scheme? Because you know you can buy shares, no voting rights. How attractive will that be?

Brian It's a more difficult one. We would have to see a lot more details, although we do have some details we need to see a lot more details, we need to see the level of communications that Fonterra is willing to become involved with outside investors. You know I'm very clear on Mighty River Power and the electricity generation companies, but the Fonterra scheme needs a lot more explanation, we need to have a lot more information. But just picking up on some of the things there. I think you could quite easily get a lot of new companies listed very quickly, it's often a thing called momentum. We haven’t had any momentum in the Stock Exchange for quite some time. I'm detecting the seeds of momentum. For example I'm seeing a company first thing on Monday morning which is looking to list, and it's in a new area, it's in an area that we haven’t had anything listed for quite some time. Now it's quite strange about markets, they become fashionable, so if one or two companies list and they do it successfully, you could actually see quite a few new companies list on the New Zealand share market in the next two to three years. I'm always kind of hopeful that that will happen, but I do detect good signs, and the change in leadership of the NZX is very positive as well, and Tim is getting out there and seeing people, which can only be helpful.

Rachel There's much that’s been made by commentators who say they have to get Mighty River Power right, they’ve got to get that right. Where do you think that they will start to look at the IPO price for example, what factors are going to determine that?

Brian Well that’s one of the most difficult things is to get the IPO price right. The two things to me is the distribution, that the shares are distributed to New Zealanders in such a way that everyone is happy that they’ve got a go at it, they’ve got a fair share, but then it's the price. You don’t want the price to be too high, like Facebook when the share price collapsed, and you don’t want it to be too low like Trade Me, where the price went from $2.70 to $4.00. You want it so it gives a return of about 8 to 18%, they're my figures, on average over a three year period. That’s where the skill of the investment banker comes in, and they will advise the government as to what the price is. Hopefully they’ll get it right, it's very important that the price is right.

Rachel Tim what do you imagine the investor makeup if you like of Mighty River Power will be?

Tim Well as Brian said it's all about distribution, and the government has clearly said that it wants to put New Zealanders first in the queue, and in order to do that it needs to think about how it's going to get a large group of retail investors into the market, and those are investors who at the moment probably don’t own shares. So we can see that the New Zealand Funds, and we can see that older investors that have money already in the share market will definitely invest in Mighty River Power. But the key to the success of this from a distribution point of view is to get some new retail investors into the market. Contact Energy was extremely successful in getting more than a 100,000 new investors into the New Zealand equity market, and that’s the goal that the government has for Mighty River Power.

Rachel Many of them though went on to sell though didn’t they Tim?

Tim There's still around 60,000 retail investors in Contact
Energy, so yes some of them have sold. I think the challenge is for NZX and for the markets is, as Brian said we have tremendous momentum here this years, it's one of the reasons I took the role. We need to make sure that we maintain that momentum post Mighty River Power and post TAF, in order to get some new companies listed, some new products for our brokers to sell, and some new assets for New Zealanders to invest in.

Brain Can I come in about Contact Energy? There was a reason why we had the big sell down. There was a takeover offer. Origin Energy bought 51% and a lot of people sold out during that, and Contact Energy hasn’t been as good as a communicator with its investors since Origin Energy took a major position. So hopefully Mighty River Power will be a much better communicator with investors, because if you communicate with investors they’ll stay, they won’t leave.

Rachel We've already heard about how a lot of people don’t quite understand actually what's going on, that’s why there's been so much opposition, that the government hasn’t got the information out there. We're told there is a big marketing plan that’s about to occur. What do you see happening on the horizon. Do you think people are going to grasp exactly what the government's trying to do there, and then look at it as a good investment?

Brian Yeah I think it is. I think Mighty River Power's an excellent investment in the current environment. Now if we were in a bull market and everything was growing very rapidly, electricity companies would be very boring, but in this kind of environment where the economy is flat, and interest rates are very low, a high yielding low risk company like Mighty River Power is going to be very attractive. It is however very important that once the company is listed that their communications is top class, because one of the problems in New Zealand is companies list and there's a lot of publicity before they list and then they forget about the shareholders, and if you forget about them they’ll leave, like any customer.

Rachel You manage a couple of funds Brian. Do you think you're going to get the return here that you could get with an Australian company?

Brian Well we don’t know the price yet so I don’t want to be making predictions at this stage, but certainly we will be investing in Mighty River Power and probably the other companies when they come along, because I think in the current environment for the Kiwi Saver fund that I run for example it's a perfect example for Kiwi Saver, because it's a long term asset and Kiwi Save's a long term investment. So these kind of companies like the electricity companies, are ideal for that kind of fund.

Rachel Alright, a good investment do you think Tim? Is this going to be a good investment across the board both Mighty River Power and the other you know Genesis, Solid Energy etc, or do you think that we need to perhaps look at offering a diversity of assets, and not just energy companies. Can you have too much of a good thing?

Tim When we look at the composition of the top part of the share market, say the NZX20 post these four MOM assets, then we will have a heavy weighting towards the energy sector. What we need to do as I said before is have a market that’s much more representative of New Zealand's economy, and obviously agricultural sector's important for that, both in terms of equity investments but also allowing our agricultural producers to manage their risk better, and secondly we need to think about those companies as Brian said before, where there are a large number of private companies that represent all sectors of the New Zealand economy. So the real challenge for us over the next few years is to encourage those companies to list, and provide those opportunities for New Zealanders to invest. One interesting fact about Kiwi Saver is, there are more Kiwi Saver funds overall invest more in the Australian share market than they do in New Zealand. So that’s just one example of where we need to do a lot of work in order to provide the right opportunities for those funds and for New Zealanders in general to invest in the New Zealand equity market.

Rachel Brian what else do you have to do to counter the disquiet that’s been in this country for weeks and weeks now, and to perhaps portray to New Zealanders actually that it's okay to do something like this, to partially sell state assets?

Brian Well the most important thing is these are not asset sales. Now when we sold the companies back in 20 years ago they were asset sales, we sold the 100%. This is the sale of shareholding with the government keeping 51%. It's a totally different proposition than we had 20 years ago. I think that if the government explains it quite well, and I don’t think it's done a very good job at that, and if it outlays its distribution policies, in other words where the shares are going to go, how New Zealanders are going to get the shares, I'm quite confident that we will get over 225,000 shareholders in Mighty River Power which is what Contact Energy got in 1999. If we do that and if it's a successful float, and the share price goes up and people get a good dividend, I think that will be sufficient to convince people that partial sales, in other words the sale of a shareholding by the government, is to the benefit of everyone.

Rachel Tim just finally to you. There are a couple of flies in the ointment here. Winston Peters says he would look to try and buy the shares back, Labour says certainly it possibly will introduce Capital Gains Tax should it form a government at the next election. Do you think that would trigger little bit of concern among investors? There's a little bit of an unknown out there.

Tim Look I think in terms of once these assets have been brought to market as Brian said, there will be a change in the sentiment within New Zealand. They're not asset sales, these are about ensuring the government maintains control of these assets and allows New Zealanders to invest alongside the government in what are very good businesses. So I think the sentiment will change next year once Mighty River Power has been listed on the market. In terms of tax changes investors are well aware of potential for tax changes in New Zealand, so I think they take that into account when they invest, and as like any investment there's obviously areas of uncertainty about the macro economic environment, about tax changes, so I think investors are certainly well aware that these things may well happen, but of course what we're focused on for the next few months is ensuring that we can do everything that’s possible to support the government, and making sure as Brian said that Mighty River Power is successful in terms of getting retail investors back into the market.

Rachel Alright Tim Bennett, CEO of the New Zealand Stock Exchange and Brian Gaynor from Milford Asset Management, appreciate your time both of you this morning gentlemen.

ENDS

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