Private versus Public Markets
It is a truism that New Zealand is a land of the SME. So why is it that we see so much effort and importance placed upon the public equity market. With the appointment of the new CEO of the NZX there was a commitment to beef up performance and bring new companies to market and make the market more vibrant. Part of that must surely be that the plethora of failures and near failures must come to an end; Pumpkin Patch, Orion Health, Intueri , Wynyard.
It is another truism that the funds management industry is enjoying huge growth in funds under management (FUM) that should be looking to public markets in which to get investment exposure and adequate returns. But interestingly the benefits of the public markets, particularly liquidity and price discovery, don’t seem to be enough to overcome the moribund market and the lack of good knew offerings. This wall of money should mean we have a robust and vibrant secondary market but we don’t.
The problems seem to get driven by the accumulation of considerable FUM in only a view hands so there are not enough divergent views and research to give rise to depth in the secondary market. This is worsened in that the FUM aggregation means deal size is now large so as to be meaningful and our limited numbers of listed companies just can’t deliver for the managers. Even funds that were once boutique now have minimum deal size of $10m to $20m. These managers are also hugging indices more and more as there isn’t the depth in the market to take significant ‘bets’ against the index – the excess return to reward active management.
It is therefore not surprising that ever more managers are looking to unlisted private companies to generate adequate returns. Individuals too are looking outside listed markets to diversify away from the index positions of their kiwis aver managers.
Hence the rise in PE funds, managers establishing funds taking unlisted positions (think Milford and Booster) and large private, sometimes Maori entities, investing directly into private companies.
That is where equity crowd funding provides individuals entree to the unlisted market; a market once the preserve of the high net worth wholesale investors. Perhaps at some point managers will also invest in equity crowd funded companies by establishing funds to target such investments. With kiwis aver funds having long invest horizons this makes sense.