Leading NZ capital markets players tell Jamie Gray the market will pick up as investment dollars try to find a home
New Zealand investors took to the sidelines after suffering the shocks of the finance company implosion, the global financial crisis, and the 2008-9 recession.
February's earthquake in Christchurch also put a dent in confidence, just as sentiment was showing signs of a comeback.
But despite some negative headwinds, investors are willing to re-enter the fray. "Things started to warm up last year and they are still relatively warm," Michael Pollard, specialist corporate partner at Simpson Grierson, says.
Pollard, who co-heads the firm's private equity and venture capital group, says low interest rates have helped to make a difference to the investor mindset.
"There are people sitting on reasonably fat balance sheets. They have been through what they think is the worst of it, so they are looking to be a bit less conservative."
Pollard is seeing a lot of "bolt-on" acquisitions and trade purchases as businesses look to consolidate. He says there are good prospects for investors wanting to mop up businesses at low prices, but overall the M&A market has been slow.
"That's understandable because we are at a low point in the economic cycle," he says. That said, there is demand for assets, particularly from well capitalised, large corporates.
"Everyone has fixed their balance sheets and they are sitting there with large sums of money looking to do something with it. The other people who are ready do go and who have been ready to go for a some time are the private equity guys," he says.
John Moore, head of equity and capital markets at Craigs Investment Partners, says individual investors are looking for good "stories" in the primary, industrial and technology sectors.
So too are the private equity funds, which are sometimes seen as the villain of the piece for buying assets cheaply and then on selling them at inflated prices.
But Moore sees them as playing an important role.
New Zealand's private equity companies are firms such as Maui Capital, Direct Capital Partners, Pencarrow and Pioneer. In Australia, they are much bigger, with names like Archer Capital, Pacific Equity Partners and Champ.
The Australian private equity firms typically have around $4 billion to invest but their New Zealand equivalents are usually in the $250 million to $325 million bracket.
Moore, who is responsible for bringing primary transactions to the markets, such as IPOs, rights issues and share placements, says it's been a rough time for New Zealand's capital markets. He is however optimistic about about the future.
He points to macro events, such as the Christchurch earthquake, which slowed down an expected economic recovery. "But just about the whole market is relatively optimistic that things will bounce back, if only slowly, and that it will continue through into the second half of 2011 and on into 2012.
"That is flowing through into more optimistic thoughts about the primary equity capital markets."
Investor demand is definitely there. Says Moore: "We know from the investor side of things, from the people our institutional desk talk to, and from the 50,000 or so retail clients up and down the country, that they are looking for good New Zealand stories to invest in."
"Obviously, primary produce, and agriculture in particular, is something that they are interested in, because it is a core strength, but there is interest in good industrial stories and even something that was not around 10 years ago - technology stories.
"Certainly, there have not been that many IPOs over the last few years - of a decent size - so you could probably say that there is more demand than supply."
Moore says there would be interest in some of the six companies that featured in the NZX's recent investment day and "there will be others who are keeping their cards closer to their chest".
There was potential for some private-equity owned assets in New Zealand that were owned either by local or Australian private equity funds that could find their way on to the share market as a possible exit. "There are some very good businesses in there - businesses that I would dearly love to bring to market," he says.
A large number of companies shored up their balance sheets in 2009 but these days, such exercises are more likely to be aimed at value or growth.
Moore and others say the capital markets need some sort of catalyst to get the ball rolling. Many are looking at the Government's partial privatisation plans as a possible event to fulfill that role. "When there has not been a deal for a while, what you sometimes need is the first one to happen before the others start to come through. There are a lot of things that need to line up, so I don't think anyone is taking anything for granted."
Moore says there are a number of private equity owned assets that are performing very well which are likely to find their way to the market over the next couple of years.
"I think there is a general realisation among most of the private equity funds that we talk to that it would be much better going forward to look at things like staged exits - hanging around in the aftermarket to prove that the company is as good as they say it is."
Some private equity deals have become unstuck. Yellow Pages was bought by Unitas Capital from Telecom in 2007 in a leveraged buyout for $2.24 billion. The asset was last year valued by the market at just $700 million, and is now controlled by its bankers.
While there is pent-up demand for equities, the same goes for corporate debt, as evidenced by the intense interest in Genesis Energy's 30-year capital bond issue, which carried a sub-investment grade rating from Standard and Poor's and which was not guaranteed by its owner, the Government. Genesis sought to raise $225 million but ended up taking on $50 million in oversubscriptions.
"It met with a lot of demand, even though it was below investment grade," said one bond market participant. "People were killed in the stampede of investors who had not had anything to invest in for a long time time," he said.
"It was everything that the market does not want at the moment. It was a sub-investment grade, it was a long dated, subordinated hybrid issue. But it got away because it was an SOE and because it was the only thing that had been around for a long time."
The BNZ's head of capital markets, Mike Faville, has noticed a strong pickup in investor appetite for corporate bonds over the past six to nine months, which he said was likely to have been driven by stronger KiwiSaver inflow and a lack of issuance in the market.
"Retail investor appetite is as strong as ever but what they are struggling to do is find the investments that they like," Faville says. "They all want quality rated issuers but they still find it hard to go much below 6.5 or 7.0 per cent on a yield basis, so all that means is that there is a build-up in appetite."
When the big deals do come, Faville expects them to be funded by a mixture of debt and equity, reflecting strong demand for both, he says.
John Moore at Craigs says there are probably more IPO and capital-raising opportunities looking out over the next two to three years than there have been for some time.
Perhaps as an indicator of things to come, Contact Energy has just launched a $351 million rights issue, which market participants expect to be well-supported.
On the mergers and acquisitions front, David Gibson, managing director and co-head of New Zealand global banking at Deutsche Bank, says the elements that fuel M&A activity are starting to improve.
Gibson says valuations are looking relatively attractive, as are the funding options available. "Balance sheets are in good shape, valuations are in good shape, funding markets are in good shape and the view on earnings is probably getting more settled."
He says the Government's plans to partly privatise the power generators could stimulate more IPO and M&A activity.
"If you look at the scale of the type of assets that they have have put on their list, they are transformational in relation to where we have been in the last five years, so they could be catalysts for further activity if the Government decides to pursue its mixed ownership model," Gibson adds.
