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Opinion: What if the NZX got the secondary board right?

Could it be that the NZX’s planned new growth board (expected by the end of the year) is just what the doctor ordered in terms of a boost for smaller companies needing investment?

Sure, the rash of new listings could just be exuberance at the top of the economic cycle.  We saw that a decade ago when, in 2004, some 37 companies listed on the NZX around the top of the last business cycle, and about a year after the NZX launched the NZAX – a new, lower-cost market for smaller companies seeking capital from the public.

The NZAX was a bit of a flop, having neither liquidity nor – crucially – analyst support.  The latter was not necessarily its fault; the advent of the NZAX roughly coincided with the emptying out of New Zealand-based bank and broker analyst departments, meaning reduced coverage of many main board stocks, let alone those on the alternative board. 

Today, many of the best stock-watchers on New Zealand’s biggest companies are in Sydney or further afield. That’s not going to reverse any time soon. So as a way to boost the profile of firms on its new growth board, the NZX has announced it will fund independent research into these companies as a matter of policy, using listing fees to do so.

The second major problem with the old NZAX was the lack of liquidity in the stocks it listed. Again, the new growth market is hoping to provide superior performance for investors by requiring the newly-listed growth companies to fund market-makers, who will continually offer prices, irrespective of whether anyone wants to trade the shares day to day.

That should hopefully give investors confidence to know that having got in, they can easily get out again. The risk of being trapped by a small, speculative investment was one of NZAX’s downsides. It could just work. 

What if… the advent of compulsory analyst research and market-making fundamentally improves the dynamics of the new secondary board and gives options for small businesses struggling to grow beyond the capital support available from family, friends, conservative banks and a Lotto win?

And what if it provides more options for investors? Don’t get me wrong: the new growth market is definitely the wrong place for Mum and Dad punters looking for a steady dividend yield. But for the stouter of heart, the new market should provide a credible new opportunity to invest in companies seeking to turn a good local idea into a global success.  Up until now, those opportunities have largely been available only to the private equity market. 

At the big end of the investor scale, the growth market should also attract the NZ Superannuation Fund, ACC and other tsunamis of government-inspired cash looking for a sliver of risk investment in their largely conservative portfolios.

As yet unknown is whether other new funding options for SMEs will take liquidity away from the new board. In particular peer-to-peer lending and crowd-sourced equity funding are available under the new Financial Markets Conduct Act regime.

Maybe, but maybe not. Appealing as they may be as concepts for democratising capitalism, it will be interesting to see whether these smaller, inherently riskier crownd-sourcing punts are a bridge too far for the Financial Markets Authority, which must administer the new act, and regulate the new tiers of investment category. 

Very low disclosure, high-risk crowd-funding and peer-to-peer lending may disappoint many.  Since they will seek very small sums from many good-hearted people, they risk being a happy hunting ground not only for fraudsters, but congenitally-optimistic people with ideas but no business skills.  People who have tapped out all available capital and the patience of family and friends.

By contrast, the new NZX growth market should offer a far better regulated environment than was available to all those who sank their dough into finance company debentures in the mid-2000s, only to lose the lot. ?

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