New Zealand is gearing up for a ‘succession wave’
This article originally appeared in the New Zealand Herald.
A positive outlook for New Zealand capital markets is creating tension between the public and private markets, writes Henry Withers.
New Zealand is gearing up for a ‘succession wave’ as the baby boomer generation looks to retire and hand over the reins of the businesses they have built up over the last 20 or 30 years.
Indeed, over the next decade, we will see one of the largest changes of business ownership in New Zealand’s history as thousands of businesses are put up for sale.
A survey of ASB’s own customer base suggests around one in four ASB customers who are business owners are considering retiring and transitioning out over the next five years.
Combined with strong domestic growth, this ‘succession wave’ is creating a recipe for heightened activity in New Zealand capital markets and will be a key driver for merger and acquisition (M&A) volume.
Although this creates a positive outlook for the New Zealand capital markets, the increase in M&A activity is also creating a healthy tension between the public and private equity markets as good businesses, that would otherwise list on the NZX, are being acquired by private equity investors or trade buyers, often at inflated earnings multiples.
Private equity has been a significant contributor to the New Zealand capital market eco-system and is in part solving the need for both growth capital and to acquire businesses when owners are looking to retire.
Last year, around US$2.5 billion was raised by private equity firms in Australia and New Zealand, with a further US$566 million raised this year already.
The private equity market generally involves firms that buy stakes in companies, with the objective of transforming them into better businesses and taking them public or selling them to another company to turn a profit.
The private equity firms use various strategies that add value, such as introducing new skills and capability, improving productivity, introducing governance and reporting frameworks, incentivising management and increasing revenue through developing new growth engines.
Cashed-up private equity firms on both sides of the Tasman have been keen to invest into quality assets, which has been driving demand for good businesses as well as company valuations (although not at the same levels just prior to the Global Financial Crisis).
In recent times private equity firms have often been willing to pay a premium over an equivalent NZX listing price.
Blackstone Group’s purchase of five retirement villages in New Zealand from Lendlease Group is a good example, as is Pacific Equity Partners’ acquisition of Academic Colleges Group. Both businesses would have received strong support from institutional investors and retail share brokers alike, but were out-bid by private equity.
This increase in appetite from offshore investors has led the Overseas Investment Office (OIO) to boost its resourcing. Statistics indicate applications are taking an average of 97 days to be processed from the date they are accepted.
Although this is a significant decrease on previous years, there is still room for improvement.
A lot of money has been made out of private equity investing, but, as with any investment, there are risks; and the demise of Dick Smith in Australia (and to a lesser extent in New Zealand) has tarnished the perception of private equity of late.
Although we are unlikely to see the same level of Initial Public Offerings (IPO’s) that were experienced in 2013 and 2014, New Zealand's public market is still an attractive option for many larger businesses and we anticipate strong secondary capital raising activity to be maintained.
Price earnings ratios are strong, and at 7378.4, the NZX50 is steadily climbing back to its high of 7571.1 recorded on September 7 last year, reflecting a reasonably strong corporate reporting season, strong economic growth and low interest rates.
Those businesses with strong earnings histories and are scalable have performed well on the NZX, and quality New Zealand businesses with a strong domestic footprint and that are scalable overseas are being strongly supported.
With an enterprise value of $585 million, and an EBITDA multiple of 13 times and price-earnings ratio of 19 times, Oceania Healthcare is a good example of this. New Zealand’s third-largest residential aged care provider and sixth largest retirement village operator, successfully raised $200 million in an IPO and dual-listed on the New Zealand and Australian stock exchanges on May 5.
It’s important to note that listing on the NZX does come with added expenses, greater regulatory oversight and enhanced reporting requirements, which doesn’t suit some businesses.
The third exit option which many business owners consider is selling to a competitor or trade buyer. The successful sale of Sistema for $660m after 34 years to US-based Newell Brands is an example of the wealth and prosperity that is being created by many successful privately owned businesses. Often trade buyers are willing to pay a premium due to the synergy benefits that can be achieved or global growth potential of a New Zealand brands, products or services.
The beneficiary of higher valuations and competitive tension between listing on the NZX, private equity or selling to a trade buyer is the business owner. Ultimately this also has a multiplier across the economy as the sale proceeds get reinvested in wealth products and spent.
ASB has supported many clients in managing the risks involved in selling their business and also assisted them in developing an inter-generational wealth management strategy with the sale proceeds. Getting good advice from a trusted advisor is critical.
Over the next decade, New Zealand will see the single largest change in business ownership in its history as the baby boomer generation looks to retire and hand over the reins.
ASB is focused on supporting both companies and business owners to achieve their ambitions and has established a specialist Capital Solutions team to connect people, ideas and capital to help ensure business owners maximise the value and ensure a successful transition over time.
Companies that have clear strategies, can demonstrate a strong competitive advantage and sustainable earnings growth will be the most sought after by investors and trade buyers alike.
Banks have an important role to play in helping businesses and their owners as they transition into retirement.
Henry Withers is ASB’s General Manager Corporate Banking