Mark Fowler: Lack of new NZX listings must concern

Overseas investors are seeing value in local businesses like Restaurant Brands, that operates KFC in New Zealand.

COMMENT: Amidst the recent equity market volatility there's been some significant merger and acquisition activity taking place in the New Zealand stock market. Namely, proposed takeovers for both Restaurant Brands and Trade Me from foreign buyers.

At first glance this appears positive, particularly for investors and considering the Trade Me offer was a more than 25 per cent increase to where the stock was trading at the time. Also, the mere fact that overseas investors are seeing value in local businesses is positive for our business community and New Zealand as a whole, especially in the case of Restaurant Brands, which is is now starting to derive significant income in overseas growth markets. However, if these businesses are to disappear from the NZX, what's in the pipeline to replace them?

The initial public offerings (IPOs) have been scarce at best, with the last notable listings being Oceania Healthcare (OCA) in May 2017 and New Zealand King Salmon (NZK) back in October 2016. And whilst both of these floats have been positive for investors, frankly, a run rate of one listing a year is hardly compelling, and is no doubt a source of concern for our business community.

If we contrast this with new debt capital market listings, the story is quite different. The second half of 2018 has seen a spate of corporates raising debt in both the retail and institutional markets. Over the same time frame as the two IPO listings we've seen Summerset, Investore Property, Heartland Bank, WEL Networks and NZ Refining as just a few examples of new issuers making a foray into debt markets. So why the diverging trajectories of the two markets?

Firstly, raising debt in the local market has never been more advantageous. Despite the constant talk of higher interest rate settings, corporates are accessing funding at historically low, cheap levels and in some cases better than what the banks will offer, and for longer periods of time. You could make the argument that as a corporate treasurer, if you are not considering the retail bond market then you are dropping the ball.

Alternatively, the path to an equity listing is costly and difficult from a compliance perspective, and this too is concerning. Medium and large commercial enterprises don't start out that way, the vast majority of them emerge from humble beginnings and, like any good business, will invariably need capital to grow at some stage. The potential of New Zealand's small business can only be unlocked with readily accessible funding. And therein lies the problem.

If we're to develop a better, deeper, more functional equity market, we need an environment where private equity isn't the only prevailing alternative. The NZX launched its NXT platform, of course (which was supposed to help smaller businesses enter the public market before transitioning to the main board) but clearly it didn't work, and has since been scrapped.

The NZX chief executive Mark Peterson regularly comments about the high-performing debt market, but sadly, if the current backdrop for equity listings remains, this may end up being one of the few things he'll have left to talk about.

• Mark Fowler is head of investments at Hobson Wealth Partners Ltd.