The New Zealand economy needs a deep and vibrant capital market into which both Mum and Dad investors and the superannuation funds can invest.
With either National’s proposed soft compulsion of Kiwisaver enrolment or Labour’s proposed compulsory Kiwisaver, along with the potential of contributions to New Zealand Super recommencing once the government’s books are back in surplus, it will become even more important for there to be an active New Zealand market in which to invest.
The Government’s proposed extension of the mixed ownership model whereby up to 49% of Genesis, Meridian, Mighty River Power, Solid Energy and Air New Zealand will be listed, will provide some much needed stimulus to other companies to list, which will hopefully turn around the dearth of new listings since 2007.
When discussing with companies whether they are considering an IPO, we are often provided with a number of reasons either not to list or not to list in New Zealand, some of which are valid, and some of which are based on some common misconceptions of the New Zealand IPO process.
Dual New Zealand/Australia listing equals higher valuation
Directors may consider carrying out a dual New Zealand and Australia listing on the expectation that this will net a higher valuation. In KPMG’s experience, while listing on two exchanges offers a number of opportunities to companies, such as access to a broader range of investors and enhanced public awareness, dual listings do not generally impact the valuation in any direct way. Further, since the prospectus will need to be compliant with the regulations in both countries where the stock will be listed, the complexity (and therefore time and cost requirements) will be increased.
Listing on foreign exchange without management change
Another common misconception held is that a company can list on a foreign exchange and then continue to operate as before without any significant change in management structure.“If a decision to list on a foreign market is made, management are likely to need to relocate to that country in order to maintain close proximity to the investor and analyst community to help the share price thrive."
The personal implications of a foreign market listing to both the director and their family should be carefully considered in the light of this possibility.
Greater chance of success if listing overseas
Some directors consider that the recent low volumes of IPOs on the New Zealand Exchange suggest that a listing overseas will be more successful. New Zealand investors, including the superannuation funds and ACC, are hungry for the right opportunities. A company that may struggle to get noticed by analysts overseas is likely to receive more attention from New Zealand investment analysts due to the recent lower volumes of IPOs.
Solid growth history attracts investors
Another common myth is that a history of solid growth is the most important factor for attracting investors. While your company’s past history of growth is important for setting precedent, most investors are more focused on the company’s potential for growth in the future.
On the flipside, a young company that has significant growth opportunities may struggle to warrant sufficient interest from investors, due to investors being interested in short-term dividend flows and a significant percentage being risk averse. Therefore, a critical part of the pre-IPO process is writing your equity story to demonstrate a balance of both growth potential in the future and sufficient maturity to generate dividends.
Underestimating the extent of examination by external advisers
Many directors and executives completely underestimate the degree of examination of their business records, strategy, plans, budgets and forecasts that will be carried out by advisors to the IPO; including lawyers, accountants and investment bankers. In our experience in reviewing forecasts, in the majority of cases the review process itself generates a number of changes to the forecasts, to either reflect updating changed circumstances, or to nail down the factors underlying the less certain assumptions.
This process means that the company can end up preparing, and the advisor end up reviewing, multiple versions of the forecasts to those published in the prospectus. KPMG strongly urges any company thinking of listing, to critically review their forecasts and business records, to ensure that these are in shape for the IPO process.
IPOs don’t require any additional effort post-setup
Beware any executive who thinks that once the IPO is over, they can relax. The reality is that financial reporting requirements increase after listing. Briefing calls, annual reports and analyst roadshows are just a few of the duties that executives of listed companies must participate in, and that may impact their ability to attend to their day-to-day responsibilities.
While there are a number of technicalities and complexities on the road to an IPO, KPMG strongly encourages directors who are considering this path to engage with an experienced IPO adviser who can turn their insight into a tailored and comprehensive roadmap, laying out a safe travel plan to help reach the intended destination.