KEY POINTS:
The wave of private equity firms seeking to buy prime New Zealand companies presents little fear to a majority of chief executives.
Nearly 60 per cent are unconcerned at the acquisition spree which has seen private equity firms gobble up some of NZ's plum corporate assets such as Independent Liquor, Hirepool and Telecom's Yellow Pages and bid for TV3 owner CanWest MediaWorks.
They suggest it will lead to greater efficiencies for local businesses and (ultimately) higher management skills. Discussions with chief executives responding to the Mood of the Boardroom survey suggest some would welcome the opportunity to run companies without the hassle of quarterly reporting restrictions which expose too much of their operations to competitors.
Not to mention the opportunity to gross up their own pay-packets if, as is often the case, an incoming owner offers them significant inducements to stay onboard.
But the two out of five CEOs who are concerned about the level of private equity-led acquisitions worry the trend will exacerbate the hollowing out of the New Zealand economy and the loss of listed stocks from the NZX.
This issue needs to be confronted as New Zealand begins the process of building its own wall of cash on the back of the KiwiSaver expansion, they suggest.
Defusing such concerns is the fact that many target companies will ultimately end up back on the NZX, either in a slimmed down form, or, through floats of significant assets that have been worked over by their new owners.
"They are potentially a source of new exchange listings," said an accounting firm chair. "But New Zealanders' ability to get part of the action depends on our ability to save."
"I believe ultimately these companies will end up back in public markets," agreed an investment banker.
A business organisation head suggested the private equity infusion would also enable companies to access capital and fund growth that New Zealand "can't afford". Another organisational chief pointed to the higher regulatory costs involved in accessing capital through the stock exchange which is contributing to the trend.
Many of the private equity-led acquisitions in this country are funded from Australia which has more than $A1 trillion of funds under management and is now a net capital exporter.
First NZ Capital chief executive Scott St John admits to concerns about the growing level of private equity acquisitions. "Not because of the activity itself, but because citizens of overseas countries that are better savers than New Zealanders are doing the buying.
"Generally you do not generate wealth from wages - generally asset ownership is a better path.
"But ultimately a number of these will come back to the NZX."
Deloitte chief executive Murray Jack cautions the trend might exacerbate the removal of decision-making on investment to Australia and the loss of job opportunities for highly-talented people
Ironically in Australia, private equity, or, other cash buyers, will face a tough time pursuing prime corporate assets after bids for high-profile companies such as Qantas, Coles Myer and APN failed to win sufficient support from institutional shareholders.
At issue is whether (and how) private capital firms will triumph in a country where share-prices have a life of their own and the institutional sector's war chest is being topped up by some $A100 billion each year from superannuation funds.
"There is shortage of quality assets at the right price," said a banker." More institutions are now holding on rather than just flicking stocks when takeover offers come round."
The Reserve Bank of Australia, and, Treasurer Peter Costello have put up warning flags about the excessive leverage on companies that comes with some private equity acquisitions.
The $A1 trillion of funds now under management in Australia has been sparked by the compulsory superannuation scheme that compels employers to put nine per cent of employees' salaries into super funds.
But Costello worries that excessive leveraging might lead to the collapse of many companies (as happened in the late 1980s) if there is an economic downturn.
Typically, target firms debt levels are loaded up in a fashion which enables the new owners to extract cash and reduce overall taxation.
Finance Minister Michael Cullen is sanguine about this risk saying New Zealand needs to access international capital flows (unlike Australia).
But the potential for excess leveraging of New Zealand companies and the economy is considered a risk by some chief executives (Though they do not rate this risk anywhere near as high as the potential for the hollowing out of the economy and loss of listed stocks).
Asked if the Reserve Bank should be given tools to monitor any additional leverage on the economy from private equity investment, 62 per cent said No. But one in five felt something should be done.
A majority (61 per cent) also said the Government should not impose restrictions on foreign firms investing in NZ.
New Zealand's open foreign investment regime has long been seen as an economic plus for a capital-starved nation.
But Cullen's decision to add an investment chapter to New Zealand's closer economic relations agreement with Australia has thrown the political spotlight on our laissez faire regime.
NZ First and the Greens want tougher criteria imposed on significant foreign investments.
They are not alone.
Nearly one-third of chief executives think it's time to have another look at whether foreign investment criteria should be imposed. "Majority ownership of certain critical infrastructure businesses should be retained within New Zealand," said a transport chief executive.
"Public interest factors need to be considered," said an investment banker." Key infrastructure assets should be viewed in a national interest context."
A communications company chief suggested there should be some sense of "shared reward" back into New Zealand from a successful investment.
Several chief executives believe it's time for New Zealand to adopt rules similar to those administered by Australia's Foreign Investment Board, or, Canada's Director of Investments, both of which have ownership restrictions on specific industries.
"The Government should study the benefits of imposing restrictions and then propose a strategy/philosophy for dealing with foreign company investment in New Zealand,,"said a consulting firm head.
But an investment banker said ownership was less of an issue that an appropriate operating framework in this context. And a law firm head warned "Governments do not do this well."
