WELLINGTON -- When technology favorite Xero delisted from the New Zealand Stock Exchange at the end of January, the market's problems in attracting and keeping growing companies came under scrutiny, despite the benchmark index scaling new highs.
The Wellington-based cloud accounting software firm with 1 million customers worldwide departed in favor of a sole listing on the Australian Securities Exchange, where it had previously had a secondary listing. Xero had been the big success story of New Zealand's fast-growing tech sector, adding excitement to a stock market dominated by more staid businesses, and its share price rose from one New Zealand dollar at the time of its initial public offering in 2007 to NZ$34 when it delisted.
The delisting highlighted broader problems at the exchange, including a decline in the number of listed companies, the lack of IPOs and the dominance of off-market trading. Aaron Gilbert, associate professor at the Auckland University of Technology, told local media at the time that the NZX risked becoming a "glorified creche" for the Australian exchange.
For Xero, consolidation of trading on the ASX led to its inclusion in the benchmark ASX200 index, attracting new institutional investment. Only shares traded on the Australian exchange would count toward the liquidity requirements of joining the ASX200, and with well over half of Xero shares previously traded on the NZX, achieving inclusion would have been much more difficult.
Between the beginning of February and mid-April, Xero shares rose 11% on the ASX, although the ASX200 index slipped 3% over the same period. Xero's withdrawal announcement in November came a week before the NZX released the outcome of a strategic review, signaling a range of reforms it hopes will revive its fortunes. Accused by some fund managers of being out of touch, the exchange says it is working much harder to build its relationships with listed companies, potential new listings and brokers.
"New Zealand is a modestly sized exchange in the South Pacific and we want to be relevant regionally and be doing the right things for our clients, our issuers -- and we want to be connected to the rest of the world," NZX Chief Executive Mark Peterson told the Nikkei Asian Review.
For many older New Zealand investors, memories of the 1987 market crash have created a preference for property investments. Economic liberalization and a worldwide boom in equities in the 1980s fueled the local market, but the bubble burst when the benchmark index plunged 50% between October and December 1987.
The capital index then serving as the benchmark, or headline, index for the New Zealand market has never recovered to the level of its 1987 peak, although the current benchmark NZX50 gross index has been hitting record highs this year. But that has obscured the fact that last year the exchange had just one IPO, and nine companies were delisted because of takeovers or insolvencies.
A report in February by New Zealand commercial law firm Chapman Tripp said this year's IPO outlook is no better, with trade sales or private equity deals proving more attractive for many companies. No upcoming IPOs are listed on the exchange's website.
"We're losing more companies from the market than we're gaining, and in business you need to be gaining more than you're losing," said Brian Gaynor, founder of fund manager Milford Investment Management. "A lot of this is evolutionary; it's been a process that's been allowed to happen over 25 years. It's not all due to the current management or board, but it's been a slow downward slide relative to the rest of the world."
International trends such as the rise of private equity and consolidation of listed companies through takeovers have been partly responsible for curbing the growth of the New Zealand market. Gaynor maintains, however, that New Zealand has still performed badly in comparison to other international markets, particularly neighboring Australia.
NZX figures show the capitalization of the New Zealand market last August was about 48% of gross domestic product, compared with the ASX's 89% and the Singapore Stock Exchange's 230%. Gaynor said the total market capitalization of the NZX has increased from 24 billion New Zealand dollars ($17.7 billion) at the end of 1987 to around NZ$130 billion now, an increase of more than fivefold. Over the same period, ASX market capitalization has grown about 13 times.
One fundamental problem causing the malaise has been the high level of off-market trading, which has reduced transparency, Gaynor said.
"On-market trading allows everybody to participate because there is visibility and transparency," he said. "If it's done off-market, only a small number of people are able to participate because the brokers keep it to the top end of town -- in other words, the institutional side."
That has made it difficult for new brokers to enter the market, Gaynor said. The number of brokerage companies -- both domestic and foreign -- has fallen from more than 50 in the 1980s to just eight now. In the same period, the number of listed companies has declined from 466 to 156.
"If you're a broker in New Zealand, you're big and you really only want to deal with big share issues," he said. "If you're a small broker and you're ambitious, you'll take any kind of new business on, but in New Zealand we don't really have any small brokers to do that."
Five New Zealand companies have chosen to list on the ASX rather than the NZX in the last three years. Gaynor largely attributes that to more aggressive marketing by Australian brokers.
Peterson, the NZX chief, said the exchange was well aware of the problems and will try to draw more trading on-market by introducing a new trading and clearing price structure, as well as new rules in the second half of this year. A trial for a new pricing structure has been running since July last year, replacing a model for on-market trades that includes a fixed-fee element with a charge based only on a percentage of the trade's value.
"The trial has been proving very successful," Peterson said. "About 18 months ago the mix ... was probably about 33% on-market and 67% off-market, and in January and February this year it's more like 50-50."
Michael Midgley, chief executive of the New Zealand Shareholders Association, said the number of off-market trades was a huge issue for investors, but added that the exchange's reforms were a step in the right direction. "I believe the release of those new pricing structures and guidelines will be good, and the NZX's willingness to engage with all the market participants is healthy," he said.
Gaynor was less optimistic, doubting the pricing reforms and new rules would be enough to bring off-market trading into line with other global exchanges, where levels were often closer to 10% to 15% of total trading.
Other reforms planned by the NZX this year are expected to result in the consolidation of three trading boards into one, eliminating two boards that had poor results in attracting smaller companies. The two boards aimed at smaller companies had relaxed compliance rules, but these had largely failed to attract new business.
"We have three equity boards at the moment for a very small equities market and that seems completely absurd," Peterson said.
These reforms and a stronger focus on serving the needs of listed companies and new prospects, as well as market participants, should lead to a renewal of the exchange's growth, Peterson said.
"We were not set up structurally around our client base, and now we are," he said. "In our core market area, if we could really unlock the potential of what New Zealand has to offer and how we connect with the rest of the world, then I think we could look back and feel pretty proud."
As for Xero, Peterson said: "I like to think they might come back. We'll see."