NZ Public Capital Markets with Sir Eion Edgar

Episode 1 of the Curious Kiwi Capitalist Podcast Show

4th August 2019

My guest for this show is Sir Eion Edgar KNZM. Sir Eion recently retired as Chairman of Forsyth Barr, a firm he was with for almost 50 years with the last 20 as Chairman. There are few people who know more about the New Zealand public capital markets.

In this show we cover the evolution of the public capital markets including:

  • the history of the various stock exchanges and their change in structure
  • the changes in investor mix over time i.e. retail, managed funds and institutional
  • the changes in diversification strategy
  • comparative changes in IPOs over the decades
  • “Muldoon’s mistake”, hint: a super mistake
  • dramatic technological change
  • the lingering damage of 1987 crash on our markets
  • whether there is a the funding gap for early stage and mid-market businesses
  • the rise of private equity
  • the problems of being listing on the stock market
  • three things to improve the capital markets

Show Notes

About Sir Eion

Sir Eion is well known for his time at Forsyth Barr but he is also a skilled private markets investor and philanthropist.

He famously invested in a potato business called Mr Chips which he sold for a handsome profit (Sir Eion and family are on the NBR Rich List) in 2008. Currently he is chairing Hawaiki Submarine Cable as well as investing through his family business the Sinclair Investment Group.

But most in Otago (an area I lived in for many years) know him for his philanthropy. He is the chair of the NZ Dementia Prevention Trust, patron of Diabetes NZ, NZ Football Foundation, NZ Sports Hall of Fame, Queenstown Trails Trust and ShelterBox NZ. He was the driving force behind the building of the Dunedin Indoor stadium and so many other local charitable causes.

But I know him best for his service to NZ Snow Sports. Not only does he support snow sports athletes through his foundation but he essentially bought a version of the winter olympics (he is a past NZOC President) to New Zealand through the Winter Games NZ. It’s here where I saw him in action, the diplomat, the businessman, athlete’s biggest fan and sports fanatic—if there is ever a role model for aspiring business people it is Sir Eion.

Sir Eion recently retired as Chairman of Forsyth Barr. He is formerly Chancellor of the University of Otago and Chairman of the New Zealand Stock Exchange. He was also formerly a Director of the Reserve Bank of New Zealand, the Accident Compensation Commission, Mt Cook Alpine Salmon, and Vero Insurance New Zealand Limited.


Transcript: Public Capital Market Interview with Sir Eion Edgar

Bruce: Thank you, Sir Eion for for doing this interview this episode about the public capital markets much appreciated. I’m sitting in your house here in sunny Queenstown looking across Lake Wakatipu. And I must say this is a fantastic view in a fantastic location.
Sir Eion: Not hard to enjoy life when you’ve got this outlook.
Bruce: The agenda for today is just to go through the evolution of the public capital markets. Of course, mainly that is the NZX, but there seems to be other things that are happening as as welll, we have the other other exchanges and we seem to have a attempts to create secondary markets as well. I’m leaving ahead of myself.
What I what I might do is just start off generally and. Move into the decades because Sir Eion you’ve been around since the 70s, you have seen it all, and talk how those public capital markets have evolved over that period of time, but firstly what’s the role of the public capital markets
Sir Eion: The public capital markets play a key role in capital formation in New Zealand without them it would be very difficult to float and raise and attract new industries, but particularly it allows for greater participation in so many of these business sectors. So an absolute key has changed over time as we’ll discuss but there’s still a very important part in raising equity in New Zealand.
Bruce: It must have started a hundred hundred fifty years ago. Just down the road both in the Otago gold fields and through the Dunedin Stock Exchange I believe.
Sir Eion: The first two stock exchanges were in Dunedin in 1868. The first two stock exchanges were formed and of course principally to raise money to search for gold that also early listed companies included banks, stock and station merchants, they were some of the early companies and insurance companies all had public shareholders, but the driving force early on was to raise money to search for gold.
Bruce: Where did the money come from? Who were the investors back then?
Sir Eion: Investors were across the board principally wealthy merchants. People who had come to live in Dunedin and had followed the hunt for gold and obviously saw there was more money to be made in supplying goods to the goldminers– lot less risk, and as a consequence of that those people built up capital and then and we’re prepared to invest in these new entities.
Bruce: Leaping forward a hundred odd years. You came on the scene and wasn’t 19…
Sir Eion: I joined…I’d always follow the share market from when I was 12, so that’s 63 years ago 62 years ago, but my father had followed the market closely so through it was a dull day when through our post box at home we didn’t get an annual report or some company information. So I followed it and bought my first shares when I was 12 and so followed the market from then was involved with share clubs when I was at University. Worked for Forsyth Barr in the holidays and then joined full-time after first work for a stockbroker in Auckland and ’69/’70 had two years there with him called Henry Hay, one of the old established firms went to London worked for two years at the stockbroker there and came back November ’72. Joined Forsyth Barr went into partnership from the 1st of April ’73 and joined the stock exchange at the same time.
Bruce: Tell me about how the stock exchange was structured back then?
Sir Eion: Yep. There was five stock exchanges in New Zealand in those days Invercargill, Dunedin, Christchurch, Wellington, Auckland. Each had individual members and you’re a member of that Stock Exchange and you paid a fee to become a member and it was run by a board of elected… I think at the time I joined we had 40 members in Dunedin and obviously Invercargill was smaller and Christchurch larger and in those days we exchanged…while we had a call over twice–ten o’clock and 3 o’clock–to exchange his you also sent telexes to our agents in Christchurch, Wellington, Auckland, we didn’t do much with Invercargill and would place orders on those exchanges, or through our agents there, so equally they would come to us because there was some shares in some particular companies were more popular and had a greater sort of liquidity in the main market like company like Helenstein’s which was based in Dunedin. So there’s more likely that buyers could get shares there so gradually that evolved we went from sending telegrams to telexs and gradually then used to ring. And that was quite interesting experience because you would have to book your phone call… if I wanted to ring the Wellington exchange at 10:20, at 10 the market would sort of give established. I would have to book that the day before and I wanted to make a call at 10:20 and then I call it to Auckland at 10:30. So it was a very slow…and Forsyth Barr were the first party in dunedin to have a telex so we had this great benefit of sending encoded form to buy shares to our Wellington Auckland agents and particular.
Bruce: I’m thinking of high-frequency trading in the…
Sir Eion: Very low frequency in those days!
Bruce: Was there arbitrage opportunities…
Sir Eion: There was and there was some brokers did do that arbitrage was more in dealing in the UK. We actively would send messages over night and often there was a pricing differential of shares that were based were quoted both in New Zealand and the UK and so there’s sometimes a bit of Arbitrage there in some Brokers a lovely guy called Jock Laidlaw who was a lovely old established stockbroker, he followed that Arbitrage pretty carefully and particularly stocks like National Mortgage and that were quoted both in London there was often a two or three penny margin something on it. But if you’re doing volume, you could make that but you’re obviously at their buyers and sellers.
Bruce: That was almost a 12 hour rather than a 12 millisecond moment of arbitrage.
And back then the fees that that Brokers were charging on the capital on the stock exchange were…
Sir Eion: The fees were, depending on the liquidity and volume, but they were around 2%. And obviously if the volume went up it droped to one and a half to one percent, so and then there was sometimes fees on top of that Stock Exchange fees, but two percent was the sort of accepted norm. And you know, transactions were most cases relatively small 500 pounds or something wasn’t so many big transactions in those days, of course because the currency was obviously had a higher value than before inflation took hold.
Bruce: In terms of the buyers and sellers in the market, was it more institutions more retail
Sir Eion: A mix there was the old established life companies, you know, the AMPs, Norwichs you know, National Mutual all those who always in the market because they as part of the capital requirements or when they’re investing funds for life insurance.
They were there, individuals were quite prominent. There’s quite a lot of private clients who love the market. I had one magnificent doctor who followed the market very actively he would do an operation and then come out and still in his gloves apparently would get his nurse to dial my number and he would place a couple of orders and then go back and do another operation and then repeat ring up and see what had happened. So it was we had some active clients but a lot of people would just followed the market and talk. So in the 70s was a relatively quiet market and we went through a couple of periods where the market was out of favor and where Forsyth Barr did well we actively help people with fixed interest investment to which helped cover the costs.
Bruce: The market of course much much different now with … a bull market and thinking more of the pricing in the market and the seventies that did seem to struggle a bit, was there much of a private market around back then? No PE firms of course, but was there some form of that type of capital?
Sir Eion: Not really most people if they’re wanting to raise Capital they went…look there was private funds established particularly forestry, there was several forestry funds set up. People put money in taking a sort of 20 year view but most of the money raised and shares were all listed on the stock exchange, as that was where the liquidity was and where investors felt safer because of audit requirements, Stock Exchange requirements…it was a very well regulated market.
Bruce: And I could still place orders on the international stock markets, so that’s..
Sir Eion: All of the Brokers had agents in predominantly the UK but also overtime at built up some interest in South Africa, obviously a lot more in Australia. Australia by far was our biggest market, most New Zealanders owned Australian shares whether they be BHP or the bank’s, big insurance companies, AMPs. So New Zealanders held shares in Australian companies some of the UK and some of the US and the odd one in South African mining shares but predominantly Australia, UK, and to lesser extent the US.
Bruce: Diversification was known back then I think in terms of diversifying your portfolio. But I think it was the very very start of building up diversified portfolios.
Sir Eion: Yeah but even then people did tend to be quite diversified. I mean, I think there was 200 companies also listed on the stock exchange, maybe more and therefore you could have quite a diversified portfolio and that’s something we always encourage you didn’t want to have all your eggs in the same the banks and insurance companies or so people tended to diversify their portfolios.
Bruce: Listings took off in the 80s, which we should get to shortly but, compared to now was there the same number of shares listed, the same number of companies listed on the stock exchange.
Sir Eion: Interestingly with the reduction in numbers in recent years probably still be a lot more listed then than there was now but certainly we went through a period in the 80s when people said you could float a rusty bucket particularly in ’85 when the numbers of listed shares doubled. I would say at least those four or five hundred companies listed on the stock exchange. Now along the were pretty fly by night and attracted speculation. Whereas, the sort of old traditional companies carried on there was mergers, rationalizations, but people predominantly invested in the quality end of the market, but some people love to have some speculation and you know, the Brierleys of the world started as one of the companies that people speculated and gradually got respectability has acquired more and more companies itself.
So it became a much bigger Beast. So no, and equally they had investments. Most of our clients probably would have had at least 20 but often up to 40% of their investments in Australia. Because of the scale and quality of the companies over there.
Bruce: Before we started recording you talked about Muldoon’s mistake. What was that? Well
Sir Eion: The Labour government I think it was ’79 introduced effectively KiwiSaver–an equivalent–and that was a wonderful initiative because it was sort of compulsory saving so people were required to money aside and it was the sort of a New Zealand superannuation fund there and it started acquiring assets became an investor in the market, bought properties, and then when Muldoon came to power, he canceled that didn’t like it because it was a Labour initiative. And that was a tragedy because whenever Labour brought it in, well received and when Muldoon came to power he canceled it and we’ve seen the difference we’ve now got a well-established KiwiSaver and superannuation funds but the Australians did it about the same time as us and have continued it and it has helped their capital formation very significantly.
Bruce: So in 1984 the Labour government came that came in the New Zealand economy was about to fall off the cliff and now Sir Roger Douglas started to do all sorts of things with different parts of different sectors. What did he do in the capital markets.
Sir Eion: Well, he did an enormous lot I mean one can, on your point, was he took away all the subsidies? And there was subsidies and everything whether it was a skinny sheep scheme, you know your paid to have sheep on the land. There was importers were all protected.
So anyone had import licenses had a margin to sell retail. It was just… He scrapped all those, and also obviously took the view that the government didn’t mean to own everything so didn’t need to own the railways. It didn’t need to own compete with the private sector. So he freed up a lot of assets which obviously encourage the Capital Market significantly because those companies were sold down into, in most cases listed entities. So that was a great help to the capital markets and there was also a confidence that people had in the reforms that he instigated that encouraged people to borrow money to invest. So it was the most significant change markets took off people had money. And were keen to invest and so we went through a period getting increasingly active from sort of ’85-’86 until it’s sort of gone into bedlam during that time.
Bruce: What did he do, or the Labour government do in terms of–or it might have been the industry–in terms of stockbroker and stock exchange?
Sir Eion: Well, several things happened firstly there was the rationalization of the stock exchanges.
Invercargill had linked with Christchurch, and then there was a recognition that we should have a National Exchange.
I think that happened in ’84-’85 so we became one stock exchange as an overarching. We still had our local exchanges, but with representation on the national body and I always remember, my first–I took over as chair of the need in stock exchange in ’87–and my first meeting of the National Exchange, which Robert Wilson another prominent Dunedin stockbroker was the chair of the NZ Stock Exchange, and my first meeting was October 20th, 1987 the day of the crash in New Zealand as a consequence of the big fallout in New York and 19th of October.
Bruce: We should get back to that as my view is that that has led to long-term damage to retail investment in the stock market.
Sir Eion: Yeah significantly.
Bruce: Around about the same time was there a technological change as well?
Sir Eion: There was subsequent to that and I’ll talk about that that really happened ’88-’89.
We changed several things 1 the requirement of the buyer to sign a share certificate and then getting rid of share certificates. And obviously screen trading, all very significant changes, but going back in ’85 things started to get more active following the Labour party’s changes and then ’86 it started to really take off and everyone wanted to invest in the market and prices increased.
And it was interesting in Forsyth Bar, we stopped taking new clients in about June July 1986. The market was so busy and the paperwork required was falling behind that we took the view that we were struggling to service our existing clients. So it would be irresponsible to take on more clients because you well, we were very unpopular with this exchange, but the wonderful thing about it was that meant our paperwork was up-to-date. When the Crash happened we at least we obviously had a lot of outstandings because we’re waiting for deliveries from other Brokers at least our own house was in order. And that stood us in very good stead post the crash but people were just everyone wanted to invest and if you went to a dinner party or wherever you went to the pub or anything, the only topic to discuss was the share market was amazing and share clubs were formed, everyone had to feel like they had to have a piece of the action.
Bruce: I was at College during those times and by golly even I was owning shares in the making a handsome profit thinking that I was the stock picker of the century because everyone was
Sir Eion: When the market was going up it was pretty hard not to be a winner. But of course there always comes rainy days and that was, you know, unfortunately people fine to invest your money, but to gear it up was the tragedy that happened to so many people they…and the banks were happy to lend and so it became a double edged sword of compounding people say exposure.
Bruce: In terms of the participants during those those boom years, well during one set of boom years because we will have had many since. What was the mix of participants, obviously institutions but within institutions where their investment funds starting to increase their…
Sir Eion: Yeah, three things happened one a significant increase in retail. Everyone had to be you know, I think it’s just this where the more than 50% of population owned shares which is amazing but also fund managers set up outside the traditional life insurance companies and that the insurance companies generally who were the big investors. We started to see funds set up saying, you know, we can do it better for you. You put your money in here and we’ll put them balanced portfolio and do it.
So those funds built up quite a lot. And you know, some of them are still around today, but a lot of them saw the opportunity to collect people’s savings and it suited a lot of people because they didn’t understand didn’t have the time or traveling so they said look better to leave it to someone who knows what they are doing.
Bruce: In seventies we talked about the diversification being across Australia the UK may be a bit of the US, but more difficult and many stocks within the New Zealand Stock Exchange.
By the opening of all the world developed world economies were many more countries being added into that diversification?
Sir Eion: No, in fact through the 80s probably most investors just concentrated on New Zealand. The old time investors long time still had this year’s had Investments offshore, but the big growth was in the New Zealand market. People could see it they can understand it was performing well, so why would you take your money outside? In fact, it was probably a swing back into New Zealand.
Bruce: Are there any investment funds that were trading back in the boom years of the 80s that are still around today?
Sir Eion: Not that I can think of because most of them Consolidated or were taken over by bigger players.
I wouldn’t I couldn’t think of any that are still around from those days. I mean apart from obviously people like the ACC. The NZ Super, but the private funds most of them have morphed into I mean, there are still some significant funds like the Fisher funds a quite a few of those Milfords but all those but they are all new entities. None of them were around in the eighties.
Bruce: Yes. So we had Black Friday wasn’t it?
Sir Eion: No Black Tuesday which was a consequence of the Monday in New
Bruce: The stock market fell…the drawdown over the coming weeks was incredible…
Sir Eion: Yeah, I mean what happened on that first day on that as I said, it was my first Stock Exchange board meeting we were getting reports and you know, the Brierleys had started at five dollars something they suddenly were four dollars and by the end of the day, they were two dollars.
So the sort of highly popular highly geared stocks fell very significantly. The Chase Corporations all those Equity Corps and that fell very significantly because and that was partly because a lot of investors in those stocks had borrowed money against it. So they are either knew themselves or the banks were telling them. You know, we need, you haven’t got any Equity now, so you need to sell everyone thought. It would probably oversold rallied slightly next morning. It’s a bit by the end of the second day at and fallen a bit further. It had its many risers, but by the end of the week, it was lower and sort of stumbled along those levels for quite some time as people had to realize stocks and there’s other people realize they had no equity and panicked.
Bruce: Our Stock Exchange during those years increased much faster than Australia and therefore it fell a lot more…
Sir Eion: A lot more New Zealand Market fell more than anywhere else in the world and took longer to recover.
Bruce: Why did it rise so much further than the other stock exchanges?
Sir Eion: I think fashion. I mean it was people felt they had to be in it and I remember a lovely old man rang me from Christchurch I met and he said now I’m sick of going to Rotary and everyone they want to talk about the share market and I’ve never been involved had my own business, but he says you better buy me some shares. So he sent down half a million dollars and said buy some shares. I said you sure you really want to? This was early ’87 and he said yeah yeah no look it’s not a lot of money relative to his worth and you know, so we invested it for him and then he rang up a couple weeks later and he said we better buy some more shares those ones have done alright, so I think he spent another 1/2 million and of course six months later or so the market fell. Now in his case, he only did it because in some ways he was sick of not having anything to talk about as he said that rotary it was the only topic on the table and he’d go to the golf club the same thing.
So in some ways everyone got caught up in it which you know, and so rational common sense went out the back door a bit. So that was a pity, in his case, he was being still quite prudent, you know, he was probably worth 20 million or so, so he wasn’t really betting the Bank. Whereas a lot of people were not only investing their money, but they were borrowing money. Which obviously compounded their problems.
Bruce: We are in one of the few Industries where people buy high and sell low the behavioral economics of
Sir Eion: Yeah, I mean and not always but I mean certainly in those days people were felt they had to be part of it. So they did buy in the top quartile of the market. We got criticized for suggesting people sell out of markets stocks like Equitycorp we thought it got overpriced and suggested people sell at around seven dollars or something.
They went to eight or nine and we were criticized but. And didn’t get many thanks when they fell to $2 so there was quite a lot of people just couldn’t accept that the market just couldn’t keep going even though the multipliers, you know, the P/Es were getting stupid and you know, but it was hard to explain to people. They said no no everyone else is buying.
Bruce: A true bubble. During the GFC people who held on within…I can’t remember the number of years but after only a few years, you probably know yourself they they came back to where they were.
It might not be a fair comparison. I’m showing my lack of knowledge about the NZX history but from the the peak in ’87., when did the stock market recover? How many years did it take to get back.
Sir Eion: I’m not certain that at least seven eight ten years. It took a long time and in some ways it was very hard to compare because a lot of the stocks never recovered went broke. And so, you know, it was only some of the traditional quality companies that ever recovered the Fletchers of the world, old established. But you know, we saw the demise of the Equitycorps, the Chases, you know, Robert Jones fell significantly it recovered eventually, but you know, a lot of the corps as they were Equitycorps Chase corp, became corpses.
Bruce: We’ve come through the Black Tuesday we’ve had a…not a generation close to a generation of people saying that’s enough. I won’t enter the stock market again.
Sir Eion: Peoples’ loss of confidence carried on a lot longer. I mean there’s people 20 years on still wouldn’t trust the market and you know in some ways understandable they’d lost money. So didn’t want to trust it and as alternative investments came up property became very fashionable and that was helped by the tax structures.
And the ability to borrow and write the costs off. So those things you know, in fact as we all know, you know, the property market in NZ has got totally over weighted as far as a sensible area to be invested in it, but you couldn’t go wrong. a. you could deduct it in the values keep rising and you were getting a tax deduction so made it attractive place to be.
Bruce: We didn’t have super like the Aussie did in the ’70s. We burned a large number of people and ’87. We then became enamored with especially residential property and like you say there was government incentives around that sort of thing..
Sir Eion: Well tax incentives, there was a way it was structured the meant could deduct all your borrowings against your rental income made it very attractive.
Bruce: You can see the history building up here, but not everything was bad.
The technology came in as you point out to me and ’88 that led to much easier trading for all sorts of different investors whether the retail on institutional and I imagine your back office suddenly became much easier as well?
Sir Eion: I mean the significant changes and I was fortunate to be involved.
The stock exchange was firstly we went from requiring share transfers to be signed by the seller, then the buyer then delivered and paid. To a what was called a scriptless system where there was no transfers in all settlements took place three, well, originally five days after the transaction. It was all automatic and then it eventually came down to three days.
So the efficiencies were unbelievable and then the other major change was of course, we went from callover system, we all went down to the stock exchange called and scrippys wrote the price up and then changed it and you bid higher lower or whatever it was until it was all on screen and so the efficiency and the volume of transactions went through the roof.
The best example of that was when after the stock exchange, obviously, paid out all the funds it had in it’s Fidelity funds and we had to pay for the cost of the changing the system to scriptless and then obviously bring in screen trading we charge a transaction of something like $15.75 a transaction by the time I stood down from teh Chair we had that down to 75 cents.
So that was because of the much increased volume in the more efficiencies that came about so the was a significant change and improvement and obviously change the back office of members of the stock exchange very considerably and became a lot more enjoyable whereas it was pretty frustrating particularly when you had clients ringing wanting to know where their share certificates were and you were waiting for it from another broker.
Then you have to when you did get it you had to get them to sign it and everything and they had often already sold it on so you then have to live …look all those things changed with screen training and particularly change to scriptless. So it was just registered, you never had to sign that made a significant difference and a lot lot more
Bruce: The fees were coming down for the retail investors to trade and yet they were they were leaving them the market because of
Sir Eion: Well, they just didn’t have the confidence and which was a tragedy because you know, in those ten years after there’s obviously some very good value and the more experienced investors did have the confidence to go back in they saw that the companies were performing. well, so a lot of people did very well out of it, but for a lot of people a they didn’t have the spare capital, they didn’t want to borrow. So they sensibly stayed out of the markets and then got the confidence in property and could obviously borrow against that had an asset they could see and understand so you could understand it.
Bruce: We haven’t talked about IPOs. In the ’80s of course, it was extraordinary. In the ’70s were you having the same sort of conversations back then as as we are now?
Sir Eion: There as still there was interested in obviously in capital markets one existing companies wanting to expand would want to have cash issues to raise extra capital and then we had companies coming to the market all the time.
I mean there was not in the mid-80s obviously that you know those new companies being flooded every week, but through the 70s, you know. The might be as a as a firm Forsyth Barr we’d be involved in three or four floatations and obviously be involved with other Brokers and other things.
So look, I’m not sure the exact numbers but there might have been 20 or 30 floats a year, so there was always people wanting wanting to raise capital.
Bruce: And in the 90s, how did the listings go in terms of numbers?
Sir Eion: Again, it slowed down considerably, a lack of confidence and also companies themselves were taking a more cautious approach. Do we need extra capital are we better to sell off part of our business too if we want to do something new. So corporates themselves were more conservative and obviously we sad to see the rise of Private Equity Funds who were saying well if you need some capital will put it in and so a lot of private enterprises who traditionally would have come to the market, said, no let’s just raise some money privately.
So Private Equity Funds built up significantly in that time investing the and of course they had a time frame usually of sort of 5 to 8,9 years where they wanted to hold it and then realize it, and sometimes then their way of exiting was to float. And so we still did have but often it was the second stage from being a private enterprise attracting outside capital and private equity and then floating after that.
Bruce: I’m not sure if it’s a myth or if it’s real, this idea of a funding gap a capital funding gap in New Zealand.
It’s applied to two sectors: Venture Capital, we have seen the recent budget trying to just address that and lots of detail to come on that one, and we’ve also seen it described for mid-market companies those perhaps less than a hundred million market cap. Do you think through the decades you’ve been involved that truly has existed for for that size company?
Sir Eion: Yes, I think, two things have happened.
The compliance costs of being a listed company, with its auditors all these things have increased and therefore the attractiveness of being a listed company has decreased.
And the second factor obviously, which is compounded that was the rise of private equity funders.
Who said well, why would you waste your time listing we can give you the money you need. And therefore you don’t have to have all these compliance requirements which have become a lot more onerous. As you know, now the FMA with the Securities Commission required greater disclosures. It meant a lot of people said, do we want to stand up in their underpants?
So that reduced…and company directors said do we want to be involved and you know quarterly requirements are at least six monthly you’ve got to do all this at it did the compliance requirements considerably increasing put off a lot of potential listed companies or proposed listed companies.
Bruce: Are compliance obligations any stricter than overseas comparable
Sir Eion: markets?
No, I mean the one area that’s really worrying people a bit now is our health and safety requirements and for listed companies that has become Draconian. I think that’s probably greater than most overseas, and the example is it all comes back on the directors not on management.
So for example if I was a director of a listed meat company. I would have to as a director physically inspect every one of our operations go right through those companies now, you know and and not only any substantial company you have to the directors have to physically inspect every one of your outlets.
Now that is I mean I was talking to a prominent company director they were going to take three weeks to get round all of their outlets. Now that’s just gone overboard. I mean no question health and safety needs to be there, but it should be management. It’s their responsibility and directors need to be saying you produce, you know, tell us you have complied.
So I think some of these things have gone too far and I think that will be a bounce back because it’s just making people saying why would I want to be a director and equally just the timeframes that’s requiring which is a cost.
Bruce: And as you come down from 100 million market cap to lower mid-market by golly the compliance costs…
Sir Eion: Yeah, very difficult to raise money for a listed company, I mean we have seen them in that 50 million level but basically, you know, the latest listing which is coming up next week, Napier Port will have a market cap of around 450 million. So the listed sector of it will be over 200 million. That’s the practical size, but I wouldn’t think it would be worth going to the market if you weren’t going to have a market cap of at least 100 million.
Bruce: They also talk about the lack of research in less than a hundred million size companies, ought to call them mid-market perhaps. Is that also driving the well firstly driving the price down for those that are listed. And for those who want to be listed and can’t see getting any research coverage, is that also affecting the the lack of listings?
Sir Eion: Totally, in fact one of the requirements we’ve seen in Forsyth Barr unless you’re going to…it’s not worth being listed unless you’re getting coverage by at least one broker, but hopefully two and that’s one of the reasons you’ve seen now in some of these more recent listings there’s been two lead managers two joint managers. To ensure that there’s at least two stockbrokers covering it because of unless you’re getting coverage and someone critically analyzing companies, how do you get a good steer of whether it’s a good investment or not? So I totally if you can’t get coverage it makes it very hard for a listed company and you see a lot of the little companies now struggle away because there’s no one following them.
You get some enthusiasts might do some homework on it and follow it but and on the other side for the stockbroker if they’re going to put the energy and resource in their research team into doing that needs to be some reasonable turnover. Yes, but it doesn’t justify so it’s being pragmatic and you know, we spend suppose as a firm six seven million on research. Well, if you’re going to spend that money you want to see there’s some activity in the in the stocks.
Bruce: And then terms of those mid-market companies, then they have all sorts of issues with the public capital markets have another option in terms of of private equity and and perhaps other institutions that are making direct investment. Is there a true funding gap there even outside the public capital markets and the private capital markets as well?
Sir Eion: No, look, I think there is in the venture capital space there always will be because you know how much could any sensible investor put in the startup sector. And we haven’t got that depth of capital that want to fund these things like the Americans who have got all these funds that just will take a blanket approach investing ten and hope on one or the ten-bagger and a couple of others will break even and so they take that on a risk.
We haven’t got that level of capital in New Zealand to do that. So they struggle you’ve got to have a very good story. In the mid caps, there is certainly plenty of money around from private equity as substantial funds there who are looking for opportunities because they want to get the money out. They don’t mean any fees until I get the money out. So there’s a natural enthusiasm to invest. Having said that, they have to perform or otherwise, they won’t attract money the next time round. So there is a natural hedge there that you have to perform if you’re going to keep attracting money. So to get you to be a listed company, you need to be above those two levels and that’s why your hundred million is probably at the bottom even now of where a listed company needs to be.
Bruce: Going back to the stock broking community back in the 90s during that time there was a move from selling a particular security to also selling a portfolio of investments so offering either investment funds or advice or at least on diversifying when did that really start and in how quickly did it take off.
Sir Eion: We probably were the leader in it Forsyth Barr we set up what was called PPM private portfolio management it came from, I’d seen it when I worked in London, in ’71 and ’72 and Michael Devereux had the idea in the late sort of ’70s early ’80s, we set up private portfolio management. So we would manage a person’s portfolio and that suited people because one some of them didn’t have a real interest but recognized a need to have part of their investments in the share market, so they were delighted someone else would do it for them.
Or secondly, they traveled and didn’t have time to follow and they were you know, so we built that up and over time and really after the ’87 crash people are lost the confidence in their own ability so it increased. And we’ve continued to build that up. It’s now up to about 8 billion we manage for clients and that’s invested predominantly in sharemarkets and fixed interest and some of it in private equity. So the larger funds that we manage some might be a couple of million we might put 5% of that into private equity. And 30%, depending on what the client wants and there’s no prescribed everyone is an individual fund, we do the paperwork hold the stocks and applying trust at nominee. So they don’t have to worry about all that they just get their report quarterly on what’s happened. They don’t like it, they can exit, there’s no cost of entry or exit. So that has become very popular. So, and other Brokers do the same. So there has been a big buildup in that sort of managed funds.
Bruce: People would do stock-picking individually and talk to the broker and obviously get the broker’s opinion, the broker would suggest stocks to them, then there was a slow move towards offering diversified portfolios. How quickly did they happen over the decades in New Zealand and Forsyth Barr?
Sir Eion: It just started quite slowly and then gradually as people got more confidence in it and as our advisors got confidence in it, obviously, they promoted it more and it built up and it’s continues to expand quite dramatically. I think what appeals to people is one no paperwork. They don’t have to worry about should they be making decisions. So they get a quarterly report telling you exactly what’s happened. They have continual access if they want to discuss anything because we have a second service now where they have to be consulted in any changes the first one private portfolio managers, they left it to the broker to do it, equally if they didn’t like it they could tell the broker or get the money back or get the shares transferred back to them whereas a second service private portfolio service is they get consulted on everything. So they feel they’re still in the loop, but don’t have to worry about any of the paperwork.
So it’s the ability to get rid of the paperwork just get a nice summary or record what’s happened. End of the year they get the income everything done sent to the accountant and everything. So all those hassles get taken away. So that’s one of the reasons its popular. They feel they’re still involved and have got the right to do anything they like but equally then they can go on a three-month overseas tour or two months or something not worried that they missing out on something?
So that’s why it’s become very popular and is increasingly so we’ll probably next year or so go through 10 billion.
Bruce: We’ve moved around a bit through the decades leapt backwards and forwards a little bit, what we have missed out is the KiwiSaver introduction that was correcting Muldoon’s mistake to go back to your description and has introduced a lot more saving and loans into the markets.
Of which small proportion stays in New Zealand, of course, what other big things can New Zealand, the New Zealand government, New Zealand Finance industry, what other large things can we do to improve the capital markets do you think?
Sir Eion: I think the three things.
Firstly that in the formation of the KiwiSaver and the New Zealand Superannuation fund.
What, even way back when I was involved in the stock exchange, of having a little much larger percentage invested in New Zealand. When they set up the New Zealand superannuation fund they said eight percent should be in NZ equities. unlike the Australians who sort of required at least 20%. And they took the long-term view that as a substantial fund, you know, the risk appetite should be spread across the world.
Once you get to a hundred billion, you can understand that but in building up to that we should have had a greater percentage in NZ. And that would have significantly helped our capital markets and we worked would have probably decreased the borrowing costs in New Zealand by about half a percent.
So we’ve had a very significant effect, but their advisor said no set it up like that forever. Where’s we think over time it should have changed, so I still believe that there is an under weighting in NZ equities and fixed interest. Which would help our markets considerably and lowering the borrowing costs.
That’s one, the second thing is, and we’re seeing a bit of rationalization now of it was based in several sort of smaller exchanges and everything, of rationalizing the one exchange and having better coverage of those exchanges and that is as we talked before about whether people will do the research, but I think that will encourage more interest in the market and we’re seeing a bit already.
There is several parties talking of listing this year. And so that will encourage.
The third aspect is the attractiveness of New Zealand as a venue for international investors, that has been very good slowed a bit, but provided we go through, you know, as markets are slowing a bit now or the confidence in our business sectors reducing that. If that recovers, which I think it will, then there will be more overseas investment wanting to come to New Zealand because it’s still on a yield basis on a governance basis. We are very well regulated and you know, a quality of our companies is very good that will attract overseas investment will again increase the market cap.
Those three factors.
Bruce: Thank you, Sir Eion your time is much appreciated. That was fascinating. We went through 50 years?
Sir Eion: Yes ‘ 72 to no, no, sorry, well, it is more than 50 years because I started investing when I was 12. So 62 years, but I’ve been actively involved, obviously at Forsyth Barr since ’72 joined November 72 so in three years time it’ll be 50 years. So 47 years.
Bruce: Thank you very much again much again.
Sir Eion: Absolute pleasure.