To list or not to list

Simon Peacocke reviews the reasons why businesses shy away from listing on the share market; why it’s time to wake up to the benefits, and the requirements for listing.
Listing on the share market is supposed to be a way to grow and enhance your business, so why do so few New Zealand mid-cap businesses embrace this public investor market? And should they reconsider?
Due to historically low listing activity, New Zealand’s share market is undersized, even for our small country. But things are shifting. A capital market development taskforce review has been completed and an overhaul of the regulatory framework instigated by the regulator – the Financial Markets Authority. It’s all starting to build trust in the markets.
We’re starting to see the return of retail investors too. With rapid growth in Kiwisavers there’s more funding available to invest in New Zealand businesses – investors who didn’t even exist a decade ago.
The other side of the coin is investment opportunities. We’re starting to see a strong IPO (Initial Public Offering) pipeline with Government’s mixed ownership model programme and the sell-down in strategic stakes in businesses, like Z Energy, Trade Me,  etc.
But there’s still not a good pipeline of small to mid-cap sized New Zealand businesses. Typically these are family held or single owner firms which five years ago wouldn’t even have considered listing.
Why? Privacy is a key reason. The wish for privacy cannot be underestimated given the tall poppy syndrome that we still suffer from in New Zealand. The transition from private company to listed company means disclosing information, allowing people to know how much you’re worth.  
Then there’s fear of losing control. Who wants an independent director looking at your financials and telling you what to do? (Although in reality, good directors can be great mentors and provide a hugely positive influence on the business, challenging management in a very good way!)
For family businesses where the management team may have been around for some time and involve family members, a listed environment may mean having to grow or upgrade capabilities – that means hard decisions. So the key is to bring in the right management talent to a company to support growth. Personnel capital is as critical as financial capital to the success of a business.
The third barrier to listing is cost, which is twofold: (1) the initial listing cost, and (2) the ongoing cost. Listing costs for a small company would be six to nine percent of the capital raised. In context that’s a one-time fee for some permanent capital for the business. The value is a price on the company which enables you to raise additional capital very quickly (think Xero!.
This provides equity that can be used for acquisitions and a price for employees so they can get shares and be owners of your business as well – a powerful motivator.
Cost of compliance is a greater concern as it requires discipline around informing shareholders and continuous disclosure. But interacting with shareholders, keeping them informed of how you’re tracking is a very good thing. A good example is NZX which publishes monthly stats, keeping its shareholders in on how the business is tracking.
Another issue is the ambition to list. If you’re running a reasonably successful mid-sized business, life is pretty good. You might be in your mid-50s and may not want to change the risk profile of your business.
NZX’s Tim Bennett is focused on waking Kiwi entrepreneurs and/or business owners to the benefits of listing – providing the capital they need to grow the business and be successful, and providing the exit they need at some time. Synlait is a good example of a company that has just listed – it has a proven track record and has sold down to the market.
Bennett’s view is that, at some point, your business will be sold – it’s inevitable. But by listing you can sell it twice. It’s not necessarily an exit the first time – it’s about more capital and then provides the option of selling completely in the future.

A matter of timing
So when is it not right to list? The key issue is whether or not you have what investors are looking for. If you don’t have the following elements intact, it’s not the time to list:
• A reasonable track record of growth of the business and a management team that is going to be able to sustain that growth into the future.
• Businesses that have a very high risk profile are not welcomed by investors – that’s the vehicle for angels or venture caps. You need the right risk profile.
• A use for the capital being raised and a plan – a credible one – for how to use that capital.
• A management team that is future ready, good governance and the right group of advisors.

There are some businesses where sale to a private equity or offshore investor makes sense. There will be some businesses that inherently would be better off sold as a trade sale to a foreign investor. In summary, if companies are thinking about rapidly growing and thinking about their options then they should be thinking about listing as an option.