Scott St John on New Zealand’s market reforms | First NZ Capital | Video
World Finance interviews Scott St John, MD and CEO of First NZ Capital, on how New Zealand's capital markets reforms restored the financial industries to robust health
The New Zealand equity market went through a “near death experience” in the first half of the decade. So says Scott St John, MD and CEO of First NZ Capital. He explains this view, outlines the action taken by the Capital Markets Taskforce established by the Labour government, and describes the effect it has had on New Zealand’s economy.
World Finance: Scott – a near-death experience? Tell me more.
Scott St John: New Zealand did not have a savings regime. And the consequence of that is that there was no natural cash flows coming into the market, takeovers were relatively meekly met, and the size of the market contracted. And what went with that, was that the financial services sector also contracted.
So you had a situation in New Zealand where we were not doing a very efficient job of putting providers of capital together with users of capital.
“We had a regulator, obviously, but the new regulator was far better resourced, had far deeper reach into the market”
World Finance: What impact did this have on the New Zealand market, and how important are these markets to New Zealand?
Scott St John: The formation of capital and this concept of putting providers of capital and users of capital together is pivotally important to economic growth, and we understood that in New Zealand, but we did a poor job of the, I guess, the oversight of what was happening in that space.
Now, that did turn around, but it took us until about 2007 to do that.
World Finance: So a critical situation like this needs of course immediate action. Who acted, and how?
Scott St John: There were many players agitating in the background, but ultimately it was Lianne Dalziel who was the then Minister of Commerce in the Labour government who was one of the hands in establishing a savings regime called KiwiSaver, in New Zealand. Then, the second big initiative on her part was to establish a capital markets taskforce.
Now, the Capital Markets Taskforce was designed to create a plan for the go forward. I think you would also look at Mark Weldon, who was at the time the recent appointed new CEO of the New Zealand Exchange. Rob Cameron, who led the Capital Markets Taskforce, and did a stunning job. But also people like Adrian Orr, who ran the superfund. Simon Botherway and a couple of others.
“As an industry we started addressing what we termed a birthrate problem. How do we fund smaller, faster growth companies?”
World Finance: Often catalysts for change are multi-dimensional: what else changed?
Scott St John: We had the plan that came out of the Capital Markets Taskforce, and that had a list of circa 40 things that needed to be implemented within the market. But at the core were things like the establishment of a new regulatory body to cover the whole market. We had a regulator, obviously, in New Zealand, but the new regulator that we created was far better resourced, had far deeper reach into the market. Far greater oversight. That delivers confidence to retail investors, and investors generally. We established a clearing house at the NZX. The government initiated its mixed ownership model, which is the privatisation of a number of state-owned electricity generators.
As an industry we started addressing what we termed a birthrate problem. How do we fund smaller, faster growth companies? Now, we don’t have the silver bullet for that yet, but we are actually getting traction, and we are IPOing some of these companies, which is particularly pleasing.
But, all in all, this is essentially a rebuild of the foundation stones of the market. The benefits that we are seeing today are a consequence of that rebuild.
World Finance: And what does this mean for investors?
Scott St John: The key platform has been this client-first mantra that has been promoted by the new regulator. It’s not that it wasn’t there at the core of the market – and particularly with the regulated space in the market, the NZX firms – but around the periphery of the market, which was more loosely regulated previously. There were issues.
So investors, having a sense that they are operating with a level playing field, has been very very important.
World Finance: So what are the current tax implications in New Zealand?
Scott St John: If you’re an offshore investor, and you look at some of the key platforms of government policy, they are relatively investor-friendly. The strong property rights, you’ve got a fiscally responsible government, they’re taking government spending down, they’re taking debt down, and we have low corporate tax. That is a very, very good platform on which to invest.
“Over the last few years… you have a market that looks wildly different”
World Finance: Although New Zealand’s economy is stronger now, it’s still rather small. What would you say to larger funds?
Scott St John: At the core is, can they get set? Is there sufficient liquidity in the market? Now, you can sort of step back from that for a moment and say, you know, do you have strong property rights? Do you have a government that is fiscally responsible? Those sorts of things are absolutely in place. Do you have an economy that’s growing? Absolutely. So you’ve got some nice things by way of backdrop.
But in terms of invest-ability, you know, how do you answer that question? Unambiguously, the breadth and depth of the market has been enhanced over the last half a dozen years. There are a lot more companies in the $2bn+ space, which, you know, one might call the border between small-cap and mid-cap. And in particular, a lot of those companies had large blocks of their stock tied up in single owners.
Over the last few years, that has been broken down by way of secondary placements, so, companies like Sky Television, which had a very low free float, now has an entire free float. Then you add, you know, the likes of Fonterra, the dairy cooperative, Synlait milk, an extremely exciting milk processing company. The government’s initiatives around the mixed ownership model, the privatisation of the electricity companies, and the privatisation of Shell’s New Zealand assets in the form of Z Energy, you have a market that looks wildly different.
World Finance: Scott, thank you.
Scott St John: Thank you.