Now is a good time to hold excess liquidity, says private equity firm Rangatira Investments.
Now is a good time to hold excess liquidity, says private equity firm Rangatira Investments.
The low interest rates of 2020 and 2021 must be seen as an aberration and are unlikely to fall to those levels again in our lifetime, says private equity firm Rangatira Investments, forecasting further slowing of the New Zealand economy.
Reporting its half-year results to September 30, the venerable privateand public sector investment company said it expects interest rates to stabilise over the next two to three years slightly below current levels as inflation falls.
“If it does this, even at those levels it is low when looking at rates over the long term,” said Rangatira, which has shareholder funds of more than $270 million.
“Higher rates will put pressure on Government spending globally. Most countries, over the last few years, have grown debt levels and, while this was able to be funded through the low interest rates of two years ago, debt servicing is becoming a larger portion of total Government spend.
“This will put constraints on future Government spending globally and flatten growth.”
The combined policy of New Zealand’s new Government was likely to bring a more conservative direction and reduced spending, said the Wellington-based company, which was founded in 1937.
“This will contract the economy in the short term, particularly in the Government sector and the service industries supporting the Government.
“With only 50 per cent of fixed mortgages now being repriced and corporate loan books still to be repriced in the next 24-36 months, it is likely we will see a slowing of the domestic economy.
“All of this points to a good time to hold excess liquidity.”
Rangatira reported its portfolio value was now $386m, or $18.44 a share, up from $18.05 a share in March. This represented a total shareholder return of 4.7 per cent for the six months, against 4.1 per cent for the corresponding period last year.
Operating earnings were up on the previous period at $5.6m, from $4.4m.
Rangatira will pay an interim dividend of 28c per ordinary share.
The firm expected earnings to continue to improve on the previous period. It was seeing good resilience in most of its investment businesses, which include Rainbow’s End, Polynesian Spa, BeGroup, Fiordland Lobster and NZ Scaffolding and interests in the primary sector.
Half-year revenue was $85.3m, compared with $83.7m in the previous period.
During the half-year, Rangatira committed to a partnership with Southern Cross Horticulture and other investors to develop a further 30 hectares of gold kiwifruit. The plan was to convert these from green orchards to gold. The structure would allow the purchase of more Zespri shares in proportion to the planting.
“Zespri shares currently have a dividend yield of 15 per cent so we see this as an attractive investment as well as the orchards,” the firm said.
David Pilkington is chairman of Rangatira Investments.
It had sold its stake in Bio-Strategy during the period.
Rangatira would have 32 per cent of its net asset value in listed equities or cash, representing its liquid portion of the fund, it said.
It hoped in the next two to three months to conclude a potential investment but, even allowing for this and the dividend payout, it would have more than 25 per cent in liquid assets at year-end.
“With interest rates looking like they are stabilising at current levels and higher than initially thought, having a high proportion of liquidity is good for Rangatira. In this environment, Rangatira can earn a high yield on cash balances while we wait for new investment opportunities.”
“At the same time, the higher rates are also depreciating the prices that we must pay for new private investments.
“To a degree, this has impacted the value of our current portfolio ... [and] the value of these businesses is also being impacted by the higher interest rates. We can manage this by holding the business through this cycle unless opportunities to sell (like Bio-Strategy) are presented.
“On this point, it is worth noting that interest rates experienced between 2020 and 2021 must be seen as an aberration rather than where they might return to. When we look at historical rates over time, you can see that we are unlikely to see them fall to the levels in 2021 again in our lifetime.”
Rangatira is 51 per cent owned by the J.R. McKenzie Trust with other community and charitable organisations owning another 15 per cent of the shares. The balance is owned by private investors.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.
