Politics

Wherefore art thou IPO?


When Shoeshine was asked to take a look at New Zealand’s IPO market, his initial response was: what IPO market?

The only fresh retail IPO this year has been the float of a 20% stake in Black Robin’s development of three alpine-style townhouses at Jack’s Point, Queenstown, via the new SME-focused Catalist Public Market (as mentioned in a previous Shoeshine).

The IPO auction is due to close at the end of August and, as of Friday morning, it had raised $555,000 of the maximum $2 million sought.

Shoeshine makes no comment on the investment itself, and is genuinely glad to see the fledgling Catalist market make some headway, but that this is the only new public markets investment to see the light of day in the first eight months of the year shows conditions are less than ideal for new company listings right now.

It’s worth taking stock at the half-way point in the year and asking: what are the factors at play in the lack of fresh meat on the market? And how will those factors evolve over time?   

Only certainty is uncertainty

The trifecta of rising inflation, rising interest rates and geopolitical concerns (read: war) has been a feature of every company earnings report this year. The only certainty is uncertainty.

It’s not even worth delving into the detail of those three determinants – there’s been so much written about them in the NBR’s pages already. 

But consider that, even at the best of times, the NZX sees very few listings. According to the World Federation of Exchanges, the NZX saw just four companies listed via IPOs in 2021, with only two of those having domestic origins. There were two domestic IPOs in 2020, two in 2019, and none in 2018. The last big year for IPOs was 2014, when 12 companies floated.

Those that do get away are not always the best advertisement for the public markets: My Food Bag’s debut last year drew criticism (most infamously from Simon Henry) due to its early-stage owners using the IPO as an opportunity to cash out, while the company’s value has sunk since the float.

Companies that had signalled they would come to market this year have now ‘paused’ or ‘delayed’, including car dealer group Armstrong’s, which was testing its story on investors as recently as early March.

Illustration: Michael Hickmott

Pragmatic, patient

The company’s chief executive Troy Kennedy said on March 21 that it was “a pragmatic decision to see us come to market under more stable investment conditions … We’re prepared to be patient and to continue executing on our growth agenda in the meantime.”

Graeme Hart was reportedly setting up his Building Supplies Group business to bring to the market, but NBR reported in May that fund managers typically in the know on such things had not been contacted about any process.

Shoeshine has heard rumours of at least one other IPO that is on ice until next year and, just last week, Lance Wiggs gave an update on the prospects of his venture capital-focused Punakaiki Fund’s near-term chances of going through with its long-held intention to float.

Punakaiki Fund manager Lance Wiggs.

Punakaiki Fund manager Lance Wiggs.

Punakaiki Fund

In the report, Wiggs noted that Punakaiki’s total asset value – mainly invested in technology companies such as Devoli, Quantifi Photonics, and Orah – is now just a few million shy of the $100m target it wanted to reach before considering the public markets.

Wiggs said in his commentary: “We have slowed this work down, however, in response to the rapid falls in the value of technology stocks on capital markets. We have no immediate plans for a listing but, if we did, it is likely that it would need to be in 2023.”

Speaking to Shoeshine, Wiggs said that Punakaiki (and its newly-named 2040 Ventures parent) is in good shape, but that the advice he was receiving was to ‘wait and see’. One of its portfolio companies was also in a good position to potentially list, but he did not want to speak out of turn about that.

“What we are seeing is people saying: ‘Okay, well, let’s wait and see what happens in the next three months and then, if you’re looking towards middle of next year, maybe the beginning, then, you know, maybe things will be okay by then.’

“But then again, if the tech stock crash continues – which it’s not unreasonable to say that it might, because the valuations are still pretty high arguably, versus say 2016 – then it might be a terrible situation next year.

“We’ve seen some stocks lose 80%. The crypto stuff can die in a fire, and some of the intrinsically bad business models – those companies may well go belly up. But there’s some good companies in there too, [ones] that have been captured by some of that [valuation drop].”

NZX origination

Bankers and brokers didn’t seem quite so eager to go on record about the market at this stage.

Shoeshine assumes many are unwilling for fear of being proved wrong – in fact they have said as much, while politely turning down the chance to be interviewed.

Most would also, Shoeshine imagines, prefer to be seen by their bosses and clients talking the market up rather than acknowledging there’s no end in sight for the uncertainty that’s plaguing their pipelines.

The exchanges themselves have nowhere to hide and NZX general manager of capital markets origination Sarah Minhinnick was happy to chat, albeit keen to focus talk on the capital raising bright spots across its equity, debt and hybrid markets: Air New Zealand’s huge capital raise in March/April; ANZ Bank’s $250m perpetual preference share offer to boost its Tier 1 capital as well as a rights issue to back its purchase of Suncorp Bank; Vital Healthcare’s retail entitlement offer.

NZX general manager of capital markets origination Sarah Minhinnick.

NZX general manager of capital markets origination Sarah Minhinnick.

More on capital raisings later, but Shoeshine brings it back to IPOs: what conditions are prospective IPO promoters looking for before they start thinking seriously about coming to market?

“If you’re a new company coming to market and you want to deliver on your forecasts, and outperform even, and have a good debut into publicly listed life, I think the uncertainty does make it a little bit harder for companies to deliver on that in the way that they might want to.

“When we do have these periods in the market, where there are bigger periods of uncertainty – like the Greek sovereign debt crisis or the initial days of Covid – you will see companies just pause. 

“They do continue working on their plans and on preparing to come to public markets as an option, but we do see them kind of pause and wait and evaluate and look for a bit more of a stable environment before they come.”

For NZX’s part, Minhinnick says there’s no let-up for the origination team when markets are subdued, as the market operator is constantly consulting with prospective candidates who are typically on a multi-year journey anyway.

Catalysing the market

Colin Magee launched the Catalist public market – New Zealand’s only other regulated stock exchange – just over a year ago with a goal of bringing 16 small and medium-sized businesses to the market in that first 12 months.

It currently has just two listed retail investments – the aforementioned Queenstown property ‘McKenzies Shute’ and a venture capital fund called Matū Iramoe. It also has five investments listed on its wholesale investor market platform.

Magee told the NBR last November that he had “seven companies actively working towards IPOs on the public market” but that the timing of any floats would depend on investor appetite during the summer months. Clearly the events during those summer months haven’t encouraged companies to emerge from the pipeline.

Catalist founder Colin Magee.

Catalist founder Colin Magee.

Speaking to Shoeshine last week, Magee was still upbeat but not really keen to throw numbers around any more.

“I hesitate to say numbers because, for instance, there’s one [business] that has had their information memorandum pretty much ready for a couple of months, and it’s just getting over that last [hurdle]. I’m 99% sure it will get there, but it’s just when it will get there.”

There are more property companies in the queue, as well as from aquaculture and more traditional product and service sectors, he says on a call between meetings in Christchurch.

“It’s the same on the business side as on the investor side – the current environment isn’t meaning that people are stopping activity – there is still M&A activity and growth potential.

“It’s actually the businesses that are looking to grow in this sort of market [that] are often the ones that do have the best long-term results. Forward-thinking advisers and founders and CEs of companies who are looking to raise to grow companies in this sort of environment, that’s definitely something that they’re still looking to do.”

The downward pressure on company valuations can create opportunities for well-capitalised businesses to engage in M&A that might have a net positive effect, even if they choose to raise some of the capital via public markets where they may not anticipate the optimal valuation.

Besides, it’s not as if companies can easily switch to debt financing, given rising interest rates are eroding the prevalence of cheap debt in the market.

Financing

Putting IPOs to one side, how should prudent companies look to finance themselves in such circumstances?

“Raise equity when you can,” says Salt Funds managing director and portfolio manager Matt Goodson. “That was very much what we saw after the GFC – I’m certainly not saying we’re going to have another GFC-type phase, but at that point, a lot of companies suddenly found that their debt servicing metrics didn’t look so healthy.

“We saw a lot of secondaries in that period, just as we saw a lot of secondaries in the period post-Covid when we had that period where demand came to a sudden stop.”

NZX’s Minhinnick also expects more debt issuance this year as bonds in the market reach maturity and yields on its debt market “for new issues” are up over 5%.

Chapman Tripp partner Rachel Dunne.

Chapman Tripp partner Rachel Dunne.

Chapman Tripp partner and equity capital markets lead Rachel Dunne also reckons the market may see more capital raisings thanks to current market conditions – whether it’s distressed companies seeking to shore up the balance sheet or others seeking to take advantage of growth opportunities.

Many listed companies came to the market to raise capital in 2020 as the effects of Covid took hold. Some still have that emergency cash on their balance sheet and should either be looking to return it to shareholders or put it to work on growth opportunities.

There is plenty of interest in how relatively new retail investors will react to a bear market, particularly in supporting listed companies with financing, Dunne says. Shoeshine notes that Air New Zealand’s latest capital raise was an interesting example of how such a refinancing – even with the odd hiccup – can capture the imagination of the investing public.

“There will be a bunch of retail investors who have invested through those platforms [such as Sharesies and Hatch] who have only seen the sharemarket effectively go one way, and that’s obviously reversing in quite a significant way at present,” says Dunne.

“So this significant market volatility that we’re seeing at the moment may put some retail investors off; we could see more subdued levels of participation by them in the market because of that.”

Last week, the NZX announced it is undertaking a review and public consultation of its capital raising settings, seemingly in response to criticisms that companies were not always required to prioritise existing shareholders when launching equity offerings – particularly during the Covid-affected period.

An interesting note: the last bullet point on the NZX feedback list says it is considering “the introduction of bespoke regimes for the listing of Special Purpose Acquisition Companies (SPACs) and dual-class share structures”.

Earnings forecasts

Looking at IPOs again from the investor side, Goodson says he’s keen to see more IPOs, but their promoters have got to be realistic.

The effect of rising bond yields has driven down equity values about as much as it’s likely to and, in general, the market has now moved from being “overpriced” to “relatively fairly priced”, he says.

However companies’ and brokers’ earnings forecasts still “look as though they have to come back a fair way yet”, he says, to match with the economic realities that companies are facing.

“While brokers’ earnings forecasts have started to [come back], our sense is they haven’t yet come back enough and it’s still relatively early in the downgrade cycle.”

Salt Funds managing director Matt Goodson.

Salt Funds managing director Matt Goodson.

The coming August results season won’t see too many misses, but the market will be closely watching the forward outlook signals that companies are sending.

He points to Restaurant Brands’ reporting ‘weak’ expected interim profit numbers last week of between $14m and $16m, down from $34.5m at the same point last year, noting that cost pressure is the main factor there.

“I think some companies are just finding out what a true earnings base is because we’ve just been through the most unusual couple of years, where a lot of business came to a sudden halt, and then we had central banks’ embark on a great tidal wave of money through the economy and relatively loose fiscal policy at the same time, and Covid re-openings … I think there’s still perhaps a little bit of rebasing for some as to what a true sustainable level of mid-cycle earnings looks like.”

But Goodson says Salt would definitely entertain investing in fresh IPOs if the promoters can stack up some certainty around earnings – but that’s a big ‘if’.

“We tend to look at what’s a reasonable mid-cycle expectation for that company, and are the margins they’re making at that level sustainable, and is their return on capital sustainable?

“Often you’ll see companies IPO when things are going relatively well, and the key question is always: is that sustainable? Do they have good opportunities to reinvest and grow even more strongly or not?

“If there were some IPOs that were able to come to market and we were satisfied around the forward earnings forecasts, which was always going to be the key question at this point in the economic cycle, then absolutely we’d take a look at them.”



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