http://bit.ly/TimMcCreadyReportCard

Tim McCready

When asked to consider the National-led Government on its performance in key areas since the 2014 election, CEOs rated the Budget surplus focus at 4.55/5 most highly, followed closely by economic growth at 4.21/5.

This is perhaps unsurprising given this year’s Budget showing the Government recording a stronger operating surplus than was forecast, and the recently released Pre-Election Fiscal Economic Update showing a robust economy growing at an average of around 3 per cent over the next four years.

“The country has benefited on many fronts from stable and skilled economic policy making,” says Beca Group chief executive Greg Lowe.

But survey respondents cautioned though National can be proud of the economic health of the country, there are significant social issues that need tackling.

“National’s steady as she goes approach needs to change up if they get another term,” says an agribusiness chairman. “They must be more aspirational in their approach to the big-ticket items including water, climate, homelessness and poverty.”

This tale of two very different report cards is obvious in the survey, with National’s performance tackling housing issues (2.43/5), environmental/water quality (2.50/5) and poverty and homelessness (2.43/5) among the five lowest scoring areas.

“There are plenty of gaps starting to appear,” says an automotive chief executive. “They have not addressed environment and housing that well as they don’t want to offend their constituency: farmers and home owners.”

New Zealand’s growing inequality gave National another poor score, with the wealth gap receiving 2.56/5.

Research released by Oxfam earlier this year showed the richest 1 per cent hold 20 per cent of the wealth in New Zealand, while 90 per cent of the population owns less than half of the nation’s wealth.

ICBC chairman Don Brash says many of these issues are interlinked, with housing the crux of the problem: “increasing wealth inequality, poverty and homelessness are all a direct result of the Government’s failure to deal with the unaffordability of housing.”

A legal boss gave National a ruthless assessment: “They have not listened on housing ideas; allowed continued Chinese money launderers a free pass via housing access; missed opportunities to intervene in the market as Australia, Hong Kong and Singapore have done; messed up citizenship and residency revenue and allowed Auckland Council to continue to mess up the city.”

Poverty and homelessness was rated by CEOs as one of the Government’s poorest performing areas since the 2014 election, receiving a rating of 2.43/5. “New Zealand’s performance on a global scale has been impressive in comparison to most economies and National deserve credit for that,” says a director of two prominent companies. “But there are some notable underachievements, including the rise of homelessness — just walk along Queen St.”

When asked “should we be doing more to help the homeless population?” 85 per cent of CEOs said yes, 5 per cent no, and 10 per cent were unsure.

“Homelessness is simply not the New Zealand way. We fail ourselves as a society by condoning it in any form,” says Simplicity managing director Sam Stubbs.

Stubbs was not alone with this sentiment. “Everyone needs a home,” and “there is always more to be done in this space,” and “surely this problem is solvable” were comments peppered throughout this year’s survey responses.

But how to tackle poverty and homelessness was much harder for business leaders to agree upon.

“Give tax breaks to low and mid-income people and stop the merry go round of money,” says Erica Crawford, Loveblock Wine chief executive.

“Our people are struggling and kids struggling to learn. Too many homeless and hungry. Do something.”

The challenge now for National is to clarify what their vision for the future is – for both New Zealand and New Zealanders, explains Deloitte chief executive Thomas Pippos. “They need to capture the hearts, souls and minds of the voting public around it – not straightforward for anyone given the shallow decision-making criteria it seems the average voter adopts.”

Cathy Quinn’s Top Three Issues
Retreat to protectionism around the world: All we can do is to keep advocating for open trade and opening doors with others.

  1. Trump commencing war with North Korea: Bill English openly warning US against it took moral courage. I think it is a position every Kiwi would agree with.
  2. The divide between the haves and have nots: I would support a programme that provides housing for the homeless and support for children in deprived families. The challenge is getting the money spent where we want it to be. For example, on kids in deprived circumstances and not diverted off elsewhere. It is in no one’s interest to simply provide dollars without a degree of confidence that it ends up helping those who are most in need. Fundamentally, as a society I believe the majority want to see the vulnerable looked after appropriately. We find it abhorrent – for whatever reason – that kids have no home, damp homes, insufficient food, no shoes. That is not the NZ most of us want.

http://bit.ly/TimMcCreadyMoodhousing

Tim McCready

Housing affordability featured highly the Herald CEO survey, rating as the fourth greatest domestic factor impacting business confidence.

CEOs scored the issue at 7.1/10 (where 1= no concern and 10 = extremely concerned).

This year the annual Demographia International Housing Affordability Survey rated Auckland as the world’s fourth least affordable city for housing, behind Hong Kong, Sydney and Vancouver.

In Auckland, the median house price is around 10 times the median household income, which is considerably higher than the threshold for affordable housing (three times median income), and as a result, home ownership rates are at record lows.

Housing unaffordability was also mentioned by most chief executives when asked more generally to outline the top three issues that are currently facing the nation.

But they are divided on whether there needs to be further intervention to constrain house price growth: 41 per cent say Yes, 55 per cent say No, and 4 per cent were in the don’t know camp.

Many respondents, including MinterEllison’s Cathy Quinn, believe the market is self-correcting: “The market is and will address itself.”

A real estate boss agrees, “the restrictions have proved successful and in my mind first home buyers need to be relaxed now.”

Business NZ CEO Kirk Hope says funding and demand factors must be aligned to ensure development can occur. “Measures to constrain demand do not fix the problem, they may provide more time to increase supply whilst restraining house price inflation,” he says.

When asked the best way to constrain house price growth, the top three options were: funding a major Government housing programme to provide affordable housing in Auckland – favoured by 50.5 per cent, bringing in a Vancouver-style foreign property buyers tax/stamp duty on all residential property transactions in Auckland (48.6 per cent) and giving urban authorities power to bypass local politicians to ensure new supply (40.0 per cent).

Infrastructure New Zealand CEO Stephen Selwood believes current Auckland plans allowing house construction to occur throughout the city have been a failure. “We need urban development at scale, by way of a satellite city to the south linked to the city by rail and high-density development centred on rail and busway stations,” he says. “The faster we build houses on current plans the worse our transport system will become.”

“As both Bill English and Phil Twyford understand (and of course David Seymour), the outrageous prices of housing in most New Zealand cities are a direct result of restraints on the availability of land, and the way we have chosen to fund infrastructure,” says ICBC chairman Don Brash.

A major banking boss remarked: “The current LVR restrictions have seen many mum and dad investors leave the Auckland market, which is good. First home buyers have come back into the market in the suburbs that were having their prices increased previously by those investors.”

Some of the lowest scoring options to constrain house price growth included extending the current two-year “bright line” test (32.4 per cent) and introducing a capital gains tax (27.6 per cent) – both of which are likely outcomes of a tax working group under a Labour-led government.

“We need to fix the tax arrangements in New Zealand that favour investment in houses over investment in productive businesses,” says Carolyn Luey, MYOB GM, Enterprise Solutions & New Zealand.

This year’s survey reveals that retaining workers due to housing affordability is becoming of increased concern (43 per cent of the CEOs responded yes, compared to 39 per cent last year).

Although most said it is only an issue in Auckland and Queenstown, several said they anticipated this would be an increasing concern in coming years.

http://bit.ly/TimMcCreadyGameChanger

Tim McCready

Jacinda Ardern’s charisma, her ability to appeal to a younger generation, and her much sought after ‘cut-through’ that former leader Andrew Little just couldn’t seem to muster are some of her most admired attributes by chief executives.

“It is refreshing to have an Opposition leader with a more positive outlook on life, rather than one that is stuck in the past or in a negative loop,” said a transport head.

Says Mainfreight’s Don Braid: “There is clearly a level of enthusiasm, energy and commitment to what is lacking in New Zealand at the moment.

“An injection of youthful energy and vision is sorely needed.”

“Much is unknown, but perhaps that’s the best way to be going into an election when she has the ‘X’ factor,” says Simplicity’s Sam Stubbs.

Although CEOs respect Ardern’s courage – stepping into the Labour leadership role less than two months out from the election – most are worried she lacks experience and her unusually short job interview for Prime Minister won’t give the public the chance to see her tested for the top job. “An impressive start as leader of the Labour Party but untested under pressure in her national leadership,” observed Rob Cameron of Cameron Partners.

There is significant concern among chief executives that Ardern has failed to articulate the detail of some of her policies. In particular, tax policies including the expected capital gains tax and a failure to provide detail on whether the proposed levy on water use for farmers will be 1 cent or 2 (a difference of 100 per cent). Many consider this unacceptable for a party that has been nine years in opposition.

“We have not seen Jacinda Ardern in a leadership role for long but the initial signs appear impressive – not least in galvanising the Labour Opposition into campaigning hard to win the election and creating some self-belief,” says Forsyth Barr managing director Neil Paviour-Smith.

Adds EMA’s Kim Campbell: “It’s too early to tell how good an administrator she will be.

“We need to see more substance in policy development.

“She is a superb communicator with a very engaging social style. We have yet to see her perform under pressure.”

“I don’t know enough about her capabilities to be useful but give her 10/10 for courage taking over as leader with eight weeks to go to a general election,” says a banking boss. “But she has been very fluffy on tax policy and how we are going to pay for all the election promises.

“It feels like a tax hike for the 12 per cent of New Zealanders who already pay 75 per cent of tax in New Zealand.”

A law firm boss said in any event, she is likely to persuade many voters to ‘give her go’ without having to prove her credentials as potential Prime Minister.

“She is in the right place at the right time.”

Speaking publicly for the first time as leader, Ardern said: “We are about to run the campaign of our lives”. Recent polling shows this is the case with Labour – jumping from 24 per cent to 43 per cent in the latest 1 News Colmar Brunton poll; its highest polling in 12 years.

Port of Tauranga chief executive Mark Cairns says: “An intelligent politician with clearly a freshening of the Labour brand. Early days though to judge Jacinda on producing sound policies (economic as well as social) and her skills at political management.”

Adds Beca’s Greg Lowe: “Jacinda Ardern is putting on a polished performance but as she has no track record her ability to lead effectively, manage the economy and put forward policy that moves New Zealand forward is unproven.”

“I really don’t know and nor do most voters,” explained non-executive director Joanna Perry. “The trouble is a lot of people will forget that she is unproven and make assumptions (in their gut!) about these things.”

A legal boss summed up the general sentiment from CEOs: “Jacinda is a very likable person. She is politically very savvy.

“She seems to care greatly about issues many Kiwis care about – social injustice and our environment, for example.

“She is a game-changer in this election.

“However, she is very young, and while that appeals to many, for others in an uncertain world we may feel safer with the more experienced hands of Bill English.

“Some may not see him as exciting, but experienced.”

Agribusiness: Greener Pastures Under Trump? (NZ Herald)

Tim McCready

Donald Trump says his Administration is “pro-agriculture,” but the rising protectionist sentiment in the United States brings with it a significant amount of uncertainty. This is particularly true for agribusiness – an industry highly dependent on global trade and one which has benefited in the past from freer trade.

Two-way trade between our two countries reached $16.1 billion in 2016, making the United States New Zealand’s third-largest individual trading partner. The US is a major market for agricultural products, and is our largest market for beef and edible offal – worth over $1 billion.

However, with the possibility of border taxes in play, a US-backed Trans-Pacific Partnership (TPP) off the table, and ongoing North American Free Trade Agreement (Nafta) negotiations, the future potential of New Zealand’s trade with the United States is uncertain.

Charles Finny, former official and trade negotiator agrees. “At this stage US policy beyond withdrawal from TPP and a strong preference for bilateral agreements is still unclear, and following the recent visit of Todd McClay to Washington DC a bilateral FTA seems a possibility,” he says.

“But would that be as good a deal as was proposed for TPP? It is too early to tell whether the Trump era trade policy will be good or bad for New Zealand.”

TPP: a leadership vacuum and new opportunities

One thing that was evident throughout the Trump campaign was that America would pull out of TPP. Trump frequently criticised the deal labelling it as “horrible,” a “bad deal,” and a “death blow for American workers.”

While a TPP that includes the US is at this stage off the cards, eleven Asia-Pacific nations – including New Zealand – remain dedicated to ensuring the regional free trade deal goes ahead. The absence of the US has created a vacuum in global trade leadership which China has been more than happy to fill by supporting the Asean-led 16-nation Regional Comprehensive Economic Partnership (RCEP).

For American agriculture, the TPP represented an opportunity for agricultural exporters to trade with what is now a very lucrative Asian economy. The American Farm Bureau Federation estimates that the deal would have boosted annual net farm income by US$4.4 billion.

There is concern in the US that other economies are in a prime position to take advantage of America’s lost opportunity. While in some cases the US is paying significant tariffs in Asia, New Zealand, for instance, is working towards the elimination of tariffs on 99 per cent of exports to key Asean markets by 2020.

The US Meat Export Federation believes its members will see a reduced market share in Japan – their largest export market if the US fails to strike some kind of Pacific trade deal soon. “What we’re worried about is 18 to 24 months from now when [Australia] can offer competitive prices and volumes on cuts that we now are supplying, but at duty rates that are double-digit lower, that really represents a handicap [to US exports],” says the Federation’s Senior Vice President for the Asia-Pacific, Joel Haggard.

The longer this disparity goes on, the bigger the disadvantage could be to the United States, and the greater the advantage to its competitors – including New Zealand.

Recognising this, Darci Vetter – who served as America’s chief agricultural trade negotiator under President Obama said:
“You want to have the best level of access at the time they start forming relationships with buyers and so the timing on this is critical and we’re going to be way behind New Zealand,” he says.

Tim Groser, New Zealand’s ambassador to the US and a former NZ trade minister who worked relentlessly to get the TPP across the line agrees.

“This is a competitive game and of course we aren’t going to sit in a hole and do nothing on these non-TPP fronts because everyone is in this game and if you fall behind you are in a competitive disadvantage.

“At the end of the day we’re all economic nationalists. Our responsibility is to look after our own country’s economic interests.”

Border taxes: sparking a trade war?

Also in play is a border tax on imports into the United States.

In a bid to support Trump’s commitment to increase American competitiveness and prevent jobs moving overseas, some congressional Republicans have put forward a proposal to apply a border adjustment tax (BAT).

The border adjustment tax is considered by some to be a critical part of tax reform, as it will mean that companies can no longer deduct the cost of imports, creating strong incentives to bring supply chains and research back to the United States.

While the introduction of a BAT would impact all sectors, agriculture is expected to be one of the hardest hit due to the amount of materials and inputs farmers rely on that come from outside the US – including fertiliser, fuel and chemicals. Moves to retain the entire value chain within the US could also spark a trade war, with countries like China and Mexico moving away from the US and instead buying their agricultural commodities from other countries.

The levy has divided Congressional Republicans. It is said that Trump is also against its introduction. And there is a question of the legality of the proposed BAT, with critics arguing it would violate United States commitments under World Trade Organisation rules which the US has signed up to.

“Any border tax adjustment runs the risk of breaching commitments made by the US in the WTO or regional/bilateral agreements,” explains Charles Finny.

“Without a detailed proposal it is impossible to comment on the trade law implications of such a policy. But if it appears to be in breach of commitments then the US should expect a challenge from a number of trade partners.

“How the Trump Administration reacts to any challenges will be interesting to observe.”

NZ-US FTA: No major impediments

Trump’s “America First” strategy has had an impact on the US involvement in regional and multilateral trade agreements. But Trump has stressed that he is not opposed to all trade agreements, and is in favour of individual deals on the proviso they can be quickly terminated “if somebody misbehaves.”

Early in his presidency, Trump told Fox News “believe me, we’re going to have a lot of trade deals. But they’ll be one-on-one. There won’t be a whole big mash pot.”

Last month, New Zealand Trade Minister Todd McClay visited Washington for talks with Trump’s Administration.

“I’ve welcomed their interest in an FTA as a demonstration of the good shape our trading relationship is in,” McClay later said.

He saw no major impediments to a trade deal with the US.

Whether Trump sees things the same way is anyone’s guess.

Capital Markets: Direct Capital spurs private equity market (NZ Herald)

Tim McCready talks to Direct Capital’s managing director, Ross George about the firm’s latest capital raising, lessons from past investments, and the state of NZ’s private equity industry
Late last year, Direct Capital raised its fifth private equity fund in New Zealand. Since it began in 1994, the firm has raised $1.2 billion, with its latest $375 million fund coming almost exclusively from existing investors in just two months.Herald: Direct Capital’s first fund was raised in 1994 — 23 years on, what has changed most in the New Zealand private equity industry?

Ross George: When Direct Capital began, private equity was a very established industry offshore, but it didn’t exist in New Zealand in a formal sense. We had to go out and explain who we were and what we wanted to do with investors, advisors, and private companies. Now Ryman Healthcare, Scales and NZ King Salmon are on the sharemarket — people know they came from private equity, and the private company market is well regarded by investors. One of the most positive changes has been the New Zealand Stock Exchange. When we started 23 years ago, you couldn’t necessarily invest in companies and then list them — the stock exchange said they were too small.

Around the world, all successful markets mirror their economies and their company stock base. The stock exchange here has now grown substantially by appealing to a broader set of companies, and it means you can keep them here in New Zealand.

Herald: You’ve just finished raising your fifth fund in the last quarter of last year. How did it go?

Ross George: We had a two-month window, and we were easily able to raise it. We wanted to cap it at $375 million, but could have raised significantly more. Over 23 years we have performed very well for investors. The feedback we receive is that we don’t take inappropriate risk, and that our performance has been consistent and very good relative to other categories. We are in the fortunate position of being able to go back to our existing investors and raise capital. That’s real recognition of our performance and just how big the private company opportunity is.Herald: What is unique about the private equity industry in New Zealand?

Ross George: In New Zealand, you can find yourself investing in the top five companies within a sector. We have managed to invest in Ryman Healthcare — the biggest in its industry, Scales — the second biggest apple producer in the country, and King Salmon — the largest salmon producer. In Australia, you’re more likely to invest in the top 15. Economically, New Zealand is doing very well, and there are a lot of good opportunities. But it’s a double-edged sword. We’re not the only ones that have noticed New Zealand is going well — the global corporates have noticed too. There is now a real desire to be here. Also, private company owners in New Zealand tend to be older than offshore. In our size bracket, that’s a real feature. As owners near retirement age, they might want to sell down but remain a 20 per cent shareholder, or change their role but stay on the board. We can work with them to understand how they want to change their life — because more often than not they don’t want to stop working abruptly.

Herald: Direct Capital’s investments have been across many different sectors — from technology and e-commerce to forestry and pharmaceuticals. Are there any particular areas you’re targeting for this fund?

Ross George: You can’t just choose an industry in New Zealand and invest in it. There are some areas such as food and primary industries that dominate in New Zealand and that we get a lot of recognition for.

These will always be a cornerstone of our funds, but we try to follow big long term trends. Food for Asia is a big trend that we think will suit us into the future. In the short term, New Zealand has done well economically over the last decade, and there has been a lot of money spent on infrastructure.

Although we’re not an infrastructure investor ourselves, we do invest in companies that provide services into the industry.

Herald: NZ King Salmon was one of your most recent exits, listing on the NZX and ASX last year. What was it that appealed to you about the company?

Ross George: NZ King Salmon is a company with good insights into how to run a primary industry. When we did due diligence on the company, we liked that it had its own hatchery, farms, processing plant, brand, and export operation. If you put that in the context of other primary industries, it has every step covered. It is a real pleasure to turn up in London and see Ora King salmon on the menu, and you think that started from the production of an egg by the one company. When we came to listing it, that was a really appealing thing. The main comment from the institutions is that this is how a lot of other primary industries should be organised.

NZ King Salmon has been a stellar performer for a long time. It produces a premium product that doesn’t have a commodity price attached to it, and can sell every kilogram of salmon it produces. The issue now is how it continues to grow. It’s a very large employer in Marlborough, and because it is a year-round employer it’s a sought-after place to work. The only problem is that it can’t grow its production enough. The government and regional councils talk about growing regional businesses that can create employment, but there has got to be enabling tools and legislation to allow them to do it.

– NZ Herald

By Tim McCready

Capital Markets: Revised NZX stance on diverse governance (NZ Herald)

Tim McCready

Some of New Zealand’s biggest businesses will now have a comprehensive, measurable diversity policy to follow.

As part of the NZX’s new Corporate Governance Code, NZX-listed companies are recommended to make their diversity policy and objectives public, and explain their attitudes and goals to achieving better diversity in the workplace.

These goals should be measurable and progress tracked. This includes reporting on the number of men and women on the board, at senior management level, and across the entire organisation.

If an organisation doesn’t have a diversity policy, the new corporate governance code requires them to explain why not.

These changes will lead directly to more listed companies establishing display metrics — including gender, but also hopefully extending to address areas such as equal pay and flexible working arrangements

Joan Withers, chair of Mighty River Power and The Warehouse, believes these changes will lead directly to more listed companies establishing diversity metrics.

“This includes gender, but also hopefully extending to areas such as equal pay and flexible working arrangements,” Withers says.

“Measurable objectives lead to greater diversity; greater diversity leads to better business outcomes — delivering to the bottom line through improved productivity, profitability and performance; better growth, innovation and customer service; and an enviable ’employer of choice’ reputational standing.”

The revised code aligns to Australia’s ASX’s diversity policy regime, which has a similar ‘if not, why not’ requirement.

Since those reporting requirements were introduced in Australia, the number of women on boards increased by 47 per cent (from 15 per cent in 2012 to 22 per cent in 2015), and the number of women in senior management positions increased by 30 per cent (from 20 per cent in 2012 to 26 per cent in 2015). Now, 99 per cent of ASX200 companies have a diversity policy in place.

A combination of reporting and voluntary target setting saw the number of women on UK’s FTSE100 boards increase by 52 per cent over four years (from 12.5 per cent in 2011 to 26 per cent in 2015).

The changes are not a quota and won’t force companies to have a specific number of women on boards.

Withers, who is also vice-chair of Global Women, is against the concept of quotas because she thinks they are demeaning.

“All of the women that I work with around the board table are there because of their all-round directorial competence. They can hack it with any of the male directors that are sitting around those same tables.

“The changes are saying that we need to be utilising — as a nation — the whole talent pool that we have got.”

Withers notes she has never been in a position where a board she is sitting on hasn’t been able to find skilled women across all areas.

Hamish Macdonald, General Counsel and Head of Policy at the NZX, says that the NZX Code sets out a series of recommendations, such as diversity, that listed companies are recommended to follow.

“Our role as a licensed market operator is to act as a standard setter but it is up to companies and the industry as a whole to progress change,” he says.

“Naturally, the aim of the NZX Code is to improve governance standards, particularly for listed companies which are smaller in size or at an earlier stage of development.

Many of New Zealand’s top listed companies will already be meeting the practices outlined in the NZX code.

“We hope the updated NZX Code leads to improved corporate governance, but ultimately it is up to shareholders to decide if they are comfortable with a company’s governance practices based on the disclosure triggered by NZX’s rules,” Macdonald says.

New rules for CEO transparency
The NZX’s Corporate Governance Code, released last week, represents a significant step forward for corporate governance reporting requirements in New Zealand.

The NZX Code has eight parts, covering principles that reflect internationally accepted corporate governance practices intended to protect the interests of and provide long term value to shareholders while also seeking to reduce the cost of capital for issuers.

Principles include ethical behaviour, board composition and performance, board committees, reporting and disclosure, remuneration, risk management, auditors, and shareholder rights and regulations.

Each principle contains specific recommendations and explanatory commentary that NZX-listed issuers are encouraged to adopt. It’s been more than 13 years since the NZX Code was reviewed.

The remuneration principle requires the pay of directors and executives to be transparent, fair, and reasonable, and includes the following recommendations:

  • An issuer should recommend director remuneration to shareholders for approval in a transparent manner. Actual director remuneration should be clearly disclosed in the issuer’s annual report.
  • An issuer should have a remuneration policy for directors and officers, which outlines the relative weightings of remuneration components and relevant performance criteria.
  • An issuer should disclose the remuneration arrangements in place for the CEO in its annual report. This should include disclosure of the base salary, short term and long term incentives, and the performance criteria used to determine performance-based payments.

Companies that do not comply with the recommendations will have to justify their decision. Currently, companies only have to report on the number of people who earn over $100,000 within salary bands of $10,000 above that threshold — and it is not always the case that the chief executive is the top earner.

Hamish Macdonald, General Counsel and Head of Policy at the NZX, says the code recommendations were designed to drive increased transparency for shareholders.

“Sound corporate governance practices can lead to a lower cost of capital and higher valuations for New Zealand listed companies. The streamlined NZX Code will result in greater transparency for investors and hopefully drive increased confidence in our capital markets.”

The NZX Code was subject to extensive market consultation — more than 80 submissions were received throughout the consultation process from major governance groups, issuers, corporate firms and investors in New Zealand and overseas.

“The extensive engagement NZX received as part of this review reflects the industry’s desire for strong corporate governance and the key leadership role NZX plays in encouraging these improved practices,” Macdonald says.

Capital Markets: Time for Prospectus NZ? (NZ Herald)

Fran O’Sullivan and Tim McCready

New Zealand is in a sweet spot.

Surely it’s time for our sharpest brains to come up with a major campaign to spruik New Zealand as an investment destination and go hard on capital markets?

“I just think the genie is out of the bottle with New Zealand,” says Nicholas Ross, country head for UBS New Zealand. “People are just going to keep coming and coming and coming.”

“If there was ever a time to be bold and to borrow a bit more this is it,” he adds. “Markets are in very good shape, they are very receptive to good proposals and interest rates are very low.”

It is a stance shared by a growing number of senior NZ capital markets players and business leaders.

New Zealand arguably remains behind the pace when it comes to applying financial leverage to fully fund the growing infrastructure gap sparked by rocketing net migration.

A Government spooked by a series of major earthquakes is wary of accruing too much debt in case it needs to use its balance sheet in the event of another costly natural disaster or recession. But this appears short-sighted when Trump’s America and Brexit have affected international perceptions and this country is increasingly viewed as a safe haven for people and capital.

Auckland Chamber of Commerce CEO Michael Barnett points out there are many options for funding the city’s growth.

But they all require capital.

Commonwealth Bank’s Andrew Woodward says the NZ debt market has shown it has the capacity to complete larger project finance transactions.

Woodward – who is general manager of CBA’s NZ operations – points to Transmission Gully and the Puhoi-to-Warkworth projects, which attracted support from domestic and offshore banks and investors and competitive outcomes for the NZ Government.

He says the continued success of this style of transaction – as well as funding of significant investment by the likes of Auckland Council and Auckland Airport – will continue to rely on domestic and increasingly international debt markets supporting growth projects, with both having targeted international debt markets to meet their growing funding requirements this year.

Says Woodward: “To aid the further development of the NZ debt market there continues to be a strong role for Government in outlining a clear pipeline of projects (across a range of asset classes including toll roads, prisons, hospitals, and rail projects), so foreign capital keeps New Zealand on the radar, as well as ensuring legislation around areas such as interest withholding tax are competitive versus other jurisdictions, and encourage investment in New Zealand.

“While the domestic debt market can meet requirements up to a certain capacity, foreign capital is expected to play an increasing role to meet the planned infrastructure spend.”
Kiwis who have collectively saved more than $40 billion in KiwiSaver – an average of just under $15,000 per person – might also question whether investment allocations are structured to deliver sufficient funding for NZ growth (and the needs of savers).

Australian research firm Strategic Insight has released figures showing total KiwiSaver balances hit $40.651 billion at the end of March; up from $38.416b at the end of December.

With KiwiSaver poised to turn 10 this year, it is worth asking whether more avenues for investment should be provided onshore.

In its report, World awash with Money, Bain & Company looked at capital trends through to 2020.

The consultancy firm predicted that for the balance of the decade, markets will generally continue to grapple with an environment of “super-abundance”.

It says there has been a power shift from the owners of capital to the growers of good ideas. “In this environment, investors’ success will be determined less by how much money they command than by their ability to spot an investment’s true creation potential and act on it nimbly.

Those that can react with speed and adaptability will be best able to identify the winners, steer clear of bubbles and generate superior returns.”

There is an abundance of innovation in New Zealand. Time for that Kiwi prospectus to fund our growth and our ideas.

Capital Markets: Venturing closer to maturity (NZ Herald)

Tim McCready

Richard Dellabarca, chief executive of the NZ Venture Investment Fund, has completed a strategic review of the industry and provided growth options to Government, reports Tim McCready
Last year, then Economic Development Minister Steven Joyce announced a review of New Zealand Venture Investment Fund’s structure, reiterating the Government’s ambition for the fund to become self-sustaining.

Soon after the announcement, Richard Dellabarca was appointed chief executive of NZVIF in mid-2016 — a move that indicated the industry was maturing.

Dellabarca, an investment banker, had spent 14 years offshore in a variety of leadership roles in venture-backed companies, capital markets, financial services and technology-related opportunities.

He brings a private sector investment perspective, but given his experience as an entrepreneur he understands what is required to build globally scalable companies.

“Really good Venture Capital funds (VCs) are looking to build businesses. Investment is an important skill to have, but their greatest skill is in building companies,” he says.

“It helps to have gone through the journey of building a global company, or a company with global aspirations, in order to understand what is needed.”

When Dellabarca joined NZVIF, he was given a blank piece of paper and the mandate to go away and undertake an independent strategic review. He has spent the last year speaking with stakeholders — around 140 organisations and 230 individuals.

Dellabarca says he is encouraged with the significant amount of investable opportunities in New Zealand, noting that founders and teams tend to be aspirational and motivated, and companies aim to be global from day one.

The review noted a growing amount of angel investment — $69 million in the last year, and more than $400 million since figures have been tracked — in addition to the significant investment into universities and Crown Research Institutes.

There is money available in New Zealand to fund proof-of-concept in early stage companies.

But a shortage of funds was identified for opportunities requiring $5-20 million in early stage growth capital.

In addition, Dellabarca noted that in the Silicon Valley or the UK, “you generally see funds syndicating with two or three investors when raising Series A & B investment.

“Yet over here, we have only Movac and Global from Day One (GD1) investing locally in growth capital, severely limiting the opportunity to syndicate investments or fully fund early stage growth companies through to maturity — and ultimately a successful realisation of the investment.”

Although eight Venture Capital funds were originally established in New Zealand, the average fund size was only NZ$45 million compared with a global average of approximately US$300 million.

Dellabarca explains there is a good reason for global fund sizes given the amount of money a company generally requires through to an investment realisation.

“They will tend to invest in, say, 15-18 companies at $5-10 million each, and then keep money aside for further follow-on investment in companies that are succeeding.

“This allows for better funds management practice, managing downside while optimising on upside opportunities,” he says.

“These historic sub-scale New Zealand funds tended to invest in a range of companies, but then either didn’t have capacity to fund them through to success and, therefore under-capitalised them, or had later stage investors dilute them down when they couldn’t follow on with the investment.

“The consequence was that many of these funds didn’t generate appropriate returns for their investors,” Dellabarca says.

While offshore corporates and financial institutions have had an interest in allocating money into New Zealand technology innovation, they have not been able to find a platform to put the money in.

As many of these institutions manage multibillion-dollar funds, the smallest investment they are willing to make is $50-$100 million.

“With an average fund size of $45 million, their mandate will often preclude them from being more than 10-20 per cent of a fund,” says Dellabarca.

“By definition you need a $300 million to $400 million fund to take these cheques.

“We just haven’t set up a fund of scale to allow foreign investors to come in and access innovation.”

NZVIF have presented a number of options to Economic Development Minister Simon Bridges that aim to make the fund self-sustainable.

Although Dellabarca is unable to divulge the details on those options, he says the fund-of-funds model with its hefty fees on fees structure is no longer viable.

The results of the strategic review provide a clue that early stage expansion capital for growth companies is New Zealand’s choke point, and is a gap NZVIF would like to address if a model that works can be established.

“There is an unmet need. You could argue about the specific number but the current deal flow suggests an annual demand of $200-$300 million,” says Dellabarca.

“If you assume our current VCs invest over five years, holding back 30 per cent for follow-on investment (the traditional venture capital investing model), then you have approximately $20-$25 million invested per year, versus a demand of up to $300 million per year.

“But whatever the number is, it is substantially larger than available capital. The aspirational goal is to have that need met in some way or another.”

Considering the future, Dellabarca says that he would like to see more money in the angel space. NZVIF is currently the second largest angel investor in New Zealand, and he hopes that in time it won’t be needed.

He has the same goal for the venture capital space.

“Hopefully in 15 years we won’t need a NZVIF in any guise, and instead there will be several self-sustaining funds of scale,” he says.

“We don’t have government intervention in private equity.

“You would hope that ultimately the same will happen in the venture capital space.”

Power of NZVIF?
The NZ Venture Investment Fund (NZVIF) was established by the Labour Government in 2002 to build a vibrant early stage investment market in New Zealand by investing alongside private venture capital funds into high-growth companies.

NZVIF currently has $245 million of funds under management which it invests through two vehicles:

  1. a $195 million venture capital fund of funds, partnering with private New Zealand venture capital funds to support the development of innovative companies from start-up through to growth (investing on a two-to-one basis).
  2. a $50 million Seed Co-Investment Fund (SCIF) established in 2005 to encourage angel investment and fill the investment gap for entrepreneurs needing capital to get their business underway (investing on a one-to-one basis).

Since its inception, NZVIF has formed 27 investment partners (16 angel and 11 venture capital partners) and invested in a portfolio of 236 companies.

NZVIF has helped stimulate $2.2 billion in leveraged capital, $1.2 billion in attracted overseas capital, employment of 6076 FTEs and $174 million in taxes.

Asia New Zealand: Generational Division in South Korea

Tim McCready

While participating in the Foundation’s offshore forum in Korea, Leadership Network member Tim McCready gauged the mood of the country following the impeachment of President Park Geun-hye. In this article, he describes a country divided along ideological and generational lines.

We arrived in Seoul for the Asia New Zealand Foundation’s offshore forum at the height of demonstrations over the the impeachment of President Park by the National Assembly. Accused of violating the constitution by helping her long-time friend extort donations from the country’s biggest business empires, Park was subsequently ousted from office in an unprecedented and unanimous ruling by the constitutional court.

The president’s ousting brought to the fore simmering tensions that run along ideological and generational lines, at the heart of which is how to deal with North Korea.

Peaceful protests are not uncommon in South Korea. The first time I visited South Korea was the one-year anniversary of the Sewol Ferry Disaster. The sinking in April 2014 cost the lives of 304 passengers and crew. This resulted in enormous protests, as South Koreans saw their government having failed to hold high-level officials accountable for the disaster.

Prior to Park’s removal, demonstrations and candlelight vigils – representing both sides – took place every Saturday over three months.

A few days after we arrived for the forum, the courts approved an arrest warrant for Park, and she was jailed. Demonstrations broke out again.

I spoke with a group of protestors living together in a tent within the city square. A man in his 70’s translated and explained to me their perspective of the situation.

“There are two distinct groups in South Korea,” he said. “One is the left wing, and the other is right wing.”

“We are the right-wing group. We follow democracy. We are protesting because the president was impeached by the left. We are embarrassed that has happened.

“It is our wish that in the future there will be unification. But it is important not to give in. The left – the younger generation – follows North Korea and China.”

While this is an extreme view, it does exemplify the generational divide in South Korea. On a simple level, the older generation think that North Korea should be dealt to with pressure and isolation. The left would prefer to have an open dialogue with the North.

A lot of this divide stems from South Korean President Park Chung-hee, the father of jailed President Park. He seized power through a military coup in 1961, at a time when South Korea was far less developed economically than the North.

By the time he was assassinated in 1979, South Korea had gone through what is referred to as the “Miracle on the Han River” – a period of rapid economic growth following the Korean War. It is because of this that Park, and his daughter, are looked on fondly by older South Koreans, despite his systematic disregard of human rights.

There are an estimated 6,700 people from separated families living in South Korea. The tragedy of the situation is most easily seen through those people who are divided from their family, who passionately long for reunification.

Now, 70 years on from the division, those with the closest ties to the North are getting very old. The requirement to seek peaceful unification between the two Korea’s is part of the South Korean constitution, yet speaking with younger South Korean’s, they are often agnostic about the prospect. They are already struggling economically, and point to the enormous economic disaster that will become their responsibility if the border were to collapse.

During a meeting with a senior banker at a major international bank in Seoul, I asked for his take on North Korea.

“I am just a simple banker,” he said, modestly.

“We are always in the shadow of war. But that aside, South Korea is a very safe place to live. That is what I care about. I don’t care what happens with North Korea.”

Younger South Korean’s I spoke with shared the banker’s point of view. They don’t worry about the looming threat of nuclear war. Instead, they are getting on with their lives, and their careers – like the rest of us.

A younger South Korean I spoke to on my flight from Seoul to Europe explained it best:

“We do not spend time worrying about what could happen. That threat has always been there,” he said.

“But we are very nationalistic. We love our country. And now our President has been jailed. We are embarrassed by her. We are embarrassed about what the rest of the world thinks of us.”

That sentiment seems to be something that all generations can agree on.

China Business: Alibaba offers sweet deals (NZ Herald)

Tim McCready chats with Alibaba’s Australia and New Zealand director of business development John O’Loghlen about the new regional office, the work being done with New Zealand businesses, and the future of online shopping.

Moving on from the rules of the WTO and global trade will allow small businesses and developing nations to tell their stories and trade together effectively using e-commerce.

Alibaba last month opened an Australian and New Zealand office in Melbourne, demonstrating the Chinese e-commerce giant’s ambition to expand its global footprint.

“Although it is headquartered in Melbourne, New Zealand is equally important,” said John O’Loghlen, Director of Business Development – Australia and New Zealand at Alibaba Group. “The leadership team in Hangzhou look at both markets together.”

Alibaba also recently appointed Pier Smulders as Director of Business Development in New Zealand, a dedicated in-market resource and experienced client service professional for Alibaba’s key accounts and opportunities in the SME space.

At the Melbourne opening, Alibaba founder Jack Ma acknowledged Australia and New Zealand’s clean environment provides a unique selling point for its businesses and will be a “goldmine” for the region’s economy over the next 15 years.

“In the past 30 years through a lack of experience in China we have a terrible polluted environment. There’s a lot we should have learned from Australia and New Zealand,” he said. With a local office and expert team, Alibaba will help Australian and New Zealand businesses share their world-famous products with billions of customers around the world.

“Whether a large company with existing links to China, or a mum-and-dad run exporter operating out of a garage, Alibaba is here to make it easy to do business,” he said.

The opening of the Australasian office comes after a strategic alliance was established between Alibaba and the New Zealand Government last year. The memorandum of understanding (MOU) signed by New Zealand Trade and Enterprise (NZTE) formalised discussions for strengthening trade between China and New Zealand, with an aim to foster greater trade opportunities for businesses seeking to enter the Chinese consumer market.

At the time of signing, NZTE chief executive Peter Chrisp said: “New Zealand businesses are already using Alibaba’s channels to sell a wide range of products including dairy, meat, seafood, fruit, wine, beverage, cereal, skincare and health supplements. By providing dedicated services for New Zealand products, this new arrangement offers significant opportunities for New Zealand businesses to reach more consumers as well as advocating New Zealand’s reputation as a place of open spaces, open hearts and open minds.”

Since the MOU was signed, Alibaba and NZTE have run workshops across New Zealand, helping exporters to gain insights into doing business with China and Chinese consumers, evaluate their business models and provide education about Alibaba’s various platforms.

Last September, NZTE and New Zealand Winegrowers established a Wine Pavilion on Tmall, dedicated to the sale of about 100 different New Zealand wines, representing all key wine regions and wine varietals.

NZTE’s Trade Commissioner in Shanghai, Damon Paling, says that wine traffic has been growing through organic and paid advertising, with the conversion rate consistent with market expectations at around two per cent, and an average basket value around NZ$120.

In addition to wine, Paling says that Alibaba platforms Tmall and Taobao are “seeing good sales of various consumer dairy products, fruits, and small categories such as manuka honey, wine, breakfast cereals, and snack bars.”

Although New Zealand and Australia is perceived as a regional “sweet spot,” O’Loghlen said it is important for businesses to appreciate that companies in Switzerland, Japan, America, South America and Britain are all looking towards China too.

“There are a lot of great brands around the world. Many countries make good milk, honey, and merino sweaters.

“In order to be successful, you not only need the best-in-class product in New Zealand and Australia, but it has to stand on its own two feet globally.”

Alibaba is spending a lot of time helping clients understand that it is important to tell their own brand story effectively, while at the same time leverage the unique advantage and narrative that comes from being a New Zealand business.

While there are a huge number of opportunities in the region, O’Loghlen said one of the most significant areas of focus over the next three-to-five years would be produce and protein.

“Seafood, beef, lamb, dairy, and really exotic produce like avocados offer an exciting opportunity.

“The fresh food space is going to be fascinating. We are really excited about fresh milk on top of what has been the first round of extended shelf-life milk into China,” he said.

Alibaba’s platforms will allow businesses to sell direct to consumers, avoiding the layers of distributors that have been a hurdle for New Zealand companies in the past.

O’Loghlen said it is really important to recognise the power of the daigou community – especially in Australia and New Zealand.

Daigou is the Chinese term given to buying items overseas on behalf of others. Products are purchased and brought into China by professional personal shoppers – or bought through online channels – with international students often acting as the intermediary.

This grey market is a multibillion-dollar business, and it can be argued that daigou can help put innovative new products on the radar.

Many New Zealand products already have an unofficial presence in-market because an enterprising Chinese New Zealander found it, liked it, and introduced it to their networks in China, said O’Loghlen.

“Chinese in New Zealand are using their mobile phones to tell the story of the region, disseminating that information back to China in real time.

“My colleagues in Europe and North America do not have an equivalent demographic that we do here [in Australia and New Zealand], in terms of percentage of the Chinese population in the large urban centres,” he said.

Chinese consumers looking to buy something from this region are receiving an accelerated experience of the New Zealand and Australian culture, because – more often than not – they know someone here.

“As Chinese authorities tighten up on the grey channels, companies will need to take hold of their own story from that of the daigou community, moving beyond a commodity phase to a more branded presence,” said O’Loghlen.

“This shift will lead to strong brands telling wonderful stories, and that is where Alibaba can help.”

O’Loghlen has spent considerable time living and working in China, and has noticed the pace of change recently has been more rapid than ever.

“Opportunities are emerging that didn’t exist previously. A lot of new platforms are geared towards small businesses and newer brands.”

Alibaba’s Australasian presence will help to ensure Australian and New Zealand businesses have the information and support necessary to succeed in China and the rest of the world.

“The office here will help businesses in the region understand that the pace of change in China is very different to that of New Zealand – or even Hong Kong or Singapore,” O’Loghlen said.

“I think if you had spoken to people in e-commerce in China several years to premium Kiwi producers

“Now we have a number of bonded warehouse opportunities. For example, Alibaba’s Taobao Global taps into a network of daigou, who ship their products through a bonded warehouse, and are as far away from a grey channel as you can imagine.”

With people in-market, Alibaba can not only help companies in Australia and New Zealand stay on top of the emerging sales channels, but also bridge the cultural chasms and language barriers that come with doing business in China.

Alibaba has made a number of investments in offline department stores over the past 18 months, in a push to merge its online platforms Tmall and Taobao with bricks-and-mortar (offline) shopping.

A surge in mobile internet usage and the growth of big data capabilities is driving this new “omnichannel” shopping experience as a way to better meet consumer demand.

The most recent move by Alibaba was a strategic partnership with Bailian Group, one of China’s largest retail conglomerates with 4700 stores across 200 cities and autonomous regions.

The two companies plan to leverage their respective consumer data to “explore new forms of retail opportunities across each other’s ecosystem,” integrating offline stores, merchandise, logistics, and payment tools to deliver a better overall shopping experience.

By combining membership data, they will be able to introduce technologies including geo-location, facial recognition, and big-data driven sales and customer management systems.

“When we talk with people here, a lot of people ask us if this is like Amazon, or what the analogy is,” said O’Loghlen. “But it is actually something very unique to China.

“These investments in offline allow consumers to experience brands. There will be a blurring of the lines in promotion online and offline.

“People [in China] are used to scanning QR codes or buying things offline and then receiving a promotion online, or vice versa,” he said.

“We have to be able to educate people very quickly about these things, because by the time it gets reported, your competitors may be up and running on the platform.

“It doesn’t require huge marketing dollars. A huge number of these promotions rely on livestreaming, which is the communication channel of choice at the moment in China.”

Marketing via livestreaming maintains a degree of exclusivity for the consumer — if they don’t tune in, they will miss out. Companies can tell their story in a more authentic way, better connecting with buyers and consumers.

“For Singles’ Day (November 11) there were 60,000 live streams between October 21 and November 11 featuring celebrities from China and overseas.”

O’Loghlen explained that if he and I were to have this same conversation in another 12 months, China will likely have moved on from livestreaming – perhaps to augmented reality or virtual reality goggles. That is not as a far-fetched as it seems. Last year the augmented reality game Pokemon Go took the world by storm.

Alibaba’s Buy+ virtual store also made its public debut in July last year at the Taobao Maker Festival in Shanghai. Buy+ – although still in beta – allows consumers to shop and browse products in a virtual environment using a headset with 360-degree views and two hand controllers. Shoppers can even have virtual models showcase apparel and accessories on a catwalk.

Ma has spoken about his aspirations for a frictionless, borderless future for e-commerce. Central to that is the establishment of an “electronic world trade platform” (eWTP), that will use the internet to remove trade barriers and allow all manufacturers and brands – regardless of their size – to have the same opportunity to enter a consumer market.

“Australia and New Zealand are both in the driving seat to take a leadership role in the eWTP rollout,” said O’Loghlen. “Moving on from the rules of the WTO and the rules of global trade will allow small businesses and developing nations to tell their stories and trade together effectively using e-commerce.

“We want to democratise the playing field for trade. A lot of people are really excited by that vision.”

A long lasting connection
Alibaba founder Jack Ma was one of the first foreign business heavyweights to meet with Donald Trump following his election victory.

In contrast to President Trump, Ma is an advocate for global trade, and says the best advertisement for globalisation is the success of one company trading with another, and hiring more people in the process.

By expanding into Australasia, Ma said Alibaba was making it easy for our businesses “to do business anywhere”.

At the opening of Alibaba’s Australasian office, Ma described the region as one he holds a long connection with.

“Australia will always have a special place in my heart and that’s why I’m so pleased to come back to contribute to supporting Australian businesses and create opportunities and jobs in a country that has meant so much for me.”

China’s richest man electrified a luncheon for former Prime Minister John Key in Beijing last April when he thanked New Zealand “for your benefit to the whole planet”.

He revealed then that 20 of Ma’s former colleagues at China’s e-commerce giant loved New Zealand so much they have retired here.

In the 1980s when Ma was 12 years old, he introduced himself to Australian Ken Morley — who was visiting China on a family holiday — in an effort to improve his English.

Ma befriended Morley’s son, who subsequently brought him to Newcastle in Australia on his first international trip.

Ma has said the time spent in Australia when he was young changed his view of China and its relationship with the world. “I am very thankful for Australia and the time I spent there in my youth. The culture, the landscape and most importantly its people had a profound positive impact on my view of the world at that time,” he said.

Last month Ma, who according to Forbes is worth US$28.2 billion and is the second wealthiest man in China, gave A$26.4 million to establish a scholarship at the University of Newcastle.

The Ma & Morley Scholarship Programme will help establish networks between the two countries, as well as provide practical training to equip beneficiaries for leadership in the global environment.