Capital Markets: Lessons and trends from the pandemic (NZ Herald)

We’ll be feeling the impact of Covid-19 for  a long time to come, in many different ways

Covid-19 has shaken capital markets globally, and the long-term impact will not be known for a long time.

Disruptive events tend to accelerate trends that are already in place, and Covid-19 will bring wide-ranging implications and deliver lessons into the future for organisations and individuals within the capital markets sector. Here’s some to chew on:

Digitisation, automation and cybersecurity

The most visible trend accelerated by Covid-19 is the leap forward in the digitisation of the economy. Westpac chief economist Dominick Stephens says there will be no going back: “that may be the last straw for some firms and a huge opportunity for others, but digitisation is a positive for the economy overall.”

Digitisation has long been mooted as a mega trend that will disrupt the capital markets sector, but the pandemic has necessitated a swift response. The past several months have exposed the requirement for firms to make a large number of decisions with increased speed and agility. Many expect the disruption to force firms in the capital markets sector to look at new operating models that are more automated and increasingly data-driven to address revenue challenges and drive down costs. This will include leveraging artificial intelligence, the cloud, machine learning and analytics to drive efficiency, improve productivity and improve competitiveness.

Increased competition from fintech firms has been eating away the market share from traditional players. Prior to Covid-19, industry giants in the capital markets were making moves to acquire and collaborate with fintech start-ups. This is expected to continue at pace, as they acknowledge openly the need for innovation to bolster their capability and agility.

However, the rapid digital transformation and changes in the way business is conducted has also brought with it a significant increase in fraudulent activity which will ensure cybersecurity remains an important consideration for capital markets. Cybersecurity firm McAfee’s quarterly report says there has been a surge of cybercrime exploiting the pandemic through Covid-19 themed malicious apps, phishing campaigns and malware. The US Federal Bureau of Investigation said it had received as many cyber-attack reports by the second week of June as it had in all of 2019.

Impacts on people, ways of working and the gender pay gap

The pandemic changed the way employees around the world worked and engaged with their workplaces and proved that remote and flexible working is possible — even in capital markets where some firms have been reluctant to embrace the trend. While most workers in New Zealand have now returned to their workplaces, many agree there were values that became more pronounced during lockdown that we should try to hold on to. Organisations are now considering how they can be more flexible, agile and have a heightened awareness of employee wellbeing. At the same time, they want to ensure that the quality of work and productivity remains high.

A recent EY article questions whether this flexibility, reprioritisation of goals and consideration of what is important could help to close the gender pay gap. Firms in the capital markets are continuing to face requirements to become more diverse. In Europe, France is demanding a 40 per cent quota of women on boards. The UK has had more than 350 financial services firms sign up to the UK Government’s Women in Finance charter, where they set targets for gender diversity. But despite this, the World Economic Forum’s Global Gender Gap Report 2020 revealed that gender parity will not be attained for 100 years.

EY notes the “wholesale levelling of the playing field” has the potential to challenge HR, talent and recruitment and lower long-standing barriers including those for parents with children or those with other caring responsibilities.

Cashless society edges ever closer

The arrival of a cashless society has been long-anticipated, but the events of this year have no doubt accelerated its arrival. Kiwis have embraced mobility and connectivity, and Covid-19 has seen us become more comfortable with e-commerce, Auckland Transport go cashless, and many stores encouraging cashless payment for hygiene reasons — with the contactless eftpos limit temporarily raised from $80 to $200.

The Bank for International Settlements released a bulletin in April, noting that Covid-19 has fanned public health concerns around the use of cash. It said that looking ahead, developments could speed up the adoption of digital payments around the world, including central bank digital currencies.

In China, digital payment platforms are already widespread, including Alibaba’s Alipay and Tencent’s WeChat Pay — so much so that in many stores cash is not accepted. Taking this a step further, China is launching a pilot programme of its digital yuan in four major cities. The currency is backed by China’s central bank, the People’s Bank of China, and is pegged to the national currency. Commentators say the objective of the digital yuan is to increase its circulation and become a global currency like the US dollar, and that the timing of the launch — when the rest of the world is dealing with the global pandemic — provides China with an unusual opportunity to beat private competitors such as Facebook’s Libra currency.

Surge in sustainable investing

During lockdown, many appreciated the return of birdsong to inner-city neighbourhoods and the quiet that came from the severely reduced traffic. Satellites mapping air pollution revealed a significant drop in nitrogen dioxide concentrations across Europe and China, coinciding with the strict quarantine measures.

Analysts are predicting Covid-19 to be a major turning point for ESG investing, or strategies that consider environmental, social and governance performance as increasingly important alongside financial metrics. The pandemic has highlighted how connected humans and society are to nature, plainly demonstrating how a fracture in one part of the ecosystem can compromise the entire system.

A survey of 50 global institutions by J.P. Morgan, representing US$12.9 trillion in assets under management, asked how they expect Covid-19 to impact the future of ESG investing. Some 71 per cent of respondents say it was “rather likely”,   “likely”, or “very likely” that a low probability — high impact risk like Covid-19 would increase awareness and actions globally to tackle high impact — high probability risks such as those related to climate change and biodiversity losses.

 

Capital Markets: Private firms get funding boost (NZ Herald)

Direct Capital successfully launched a $425 million fund in February — just as the coronavirus pandemic started to affect New Zealand — capping it in just over seven weeks.

Direct Capital Managing Director Ross George says “economic ups and downs are one thing, but the Covid-19 situation has been unique for us all”.

“It would have been easy for investors to hold off committing to the new fund. Their support speaks volumes about their commitment to the private company market. It’s a market that has provided a very successful track record of consistent returns over a long period and that consistency is valued during times like this.”

George, who launched Direct Capital’s first fund some 26 years ago aged 32, attributes the success to the firm’s loyal base of institutional investors, including the NZ Super Fund, Annuitas, ACC, a number of community trusts, and the Pohutukawa VI fund.

The Direct Capital VI fund will again focus on companies operating in New Zealand’s mid-market, companies with annual revenues of between $50 million and $350+ million that are looking for fresh capital to fund new growth initiatives, trans-Tasman expansion, or to manage a change in ownership.

The addition of the $425m fund brings to over $1.7 billion the total funds raised by Direct Capital in its 26-year history of investment into private companies.

Historic successes

Direct Capital’s fifth fund, which raised $375 million in 2016, has now been fully invested across a portfolio of eight companies — including apparel supplier AS Colour, trust management company Perpetual Guardian, engineering consultancy firm Beca Group and retirement village operator Qestral Corporation. Australian-based investments include food manufacturer Marvel Packers and health provider Exact Radiology.

Capping off the portfolio’s investments were New Zealand’s largest provider of skin treatment and appearance medicine Caci Group Holdings, and New Zealand’s largest heavy vehicle leasing and rental company TR Group.

Director Heath Kerr says he is delighted in the portfolio of companies that Direct Capital has been able to invest in in its latest fund.

“These private companies span diverse industries and geographies, are the market leaders in their respective sectors and in each case our shareholder partners continue to own a material shareholding ensuring alignment of interest.” He says this has been a key feature of Direct Capital’s investment approach over the years.

“Earlier investments into companies such as Scales Corporation, New Zealand King Salmon, both of which are now listed on the NZX, Bayleys Real Estate, New Zealand Pharmaceuticals, and the many other great companies going all the way back to our early investment in Ryman Healthcare, have all been about backing the momentum players. Backing those companies with capital has been a very big driver of growth and value.”

George says there are a number of factors that contribute to the success of private company investment. “One of the key drivers is the employee ownership model that we adopt. In large corporates or listed companies, employees are often motivated by career path only,” he says.

“In private companies, and where employees are also significant shareholders, their motivation becomes the same as Direct Capital’s — matching the capital that we can provide to common sense growth initiatives that creates shareholder value, and doing so without taking unnecessary risk.

“It is that alignment of interest between shareholders and employees that is just as important during the good times as it is during more challenging periods such as now.”

The engine of growth

Kerr says the economic environment resulting from the Covid-19 pandemic will raise big challenges for a long time to come, and the ability to invest in and support the growth of New Zealand companies will be critical to New Zealand’s economic recovery.

“Private companies have always been the proverbial engine room of the economy,” he says. “Investing new capital into private companies and backing their expansion plans, invariably sees growth rates in both revenue and employee numbers outperform the market.”

He says the companies Direct Capital has invested in over the years have, in aggregate, employed nearly 10,000 staff.

“It is a meaningful segment of the economy.

“With the investment of capital, we have seen revenue growth, on average, exceed 65 per cent during the period of our investment. That revenue growth has supported employment growth of more than 50 per cent.”

Fellow director Gavin Lonergan says Direct Capital’s investments have also seen growth in other metrics such as capital expenditure and geographic expansion.

“This combination of capital, backing the momentum player in an industry and partnering with executives and employees who are also shareholders in the business, creates a powerful force which results in a step-change for the business,” he says.

He notes that when this is done on scale, it provides a much broader benefit to the economy.

Target companies

Hugh Cotterill, who joined the firm in 2019, says a key factor in the firm’s success has been the strong relationship developed between Direct Capital and its partner shareholders.

“Private companies are typically family owned or owned by a small number of shareholders,” he says.

“We are often introduced to a business in which the owners are thinking about funding a step-change in growth — often an acquisition of either a competitor or a complementary business in a different geographic market such as Australia, or where the owners may be in their 50s or 60s and beginning to think about a succession plan over time.

“In either case, it is a big decision for owners and they need to find a partner they are really comfortable with, and, given that Direct Capital invests for the long term, it’s also important that we understand the business and can work alongside the existing owners.”

A lower debt environment

One of the key investment themes Direct Capital expects to see over the next 3-5 years is a move back to using equity to fund growth, rather than companies taking on more debt — despite the current low interest rates.

Kerr says the Covid-19 lockdown period will have highlighted the real cost of carrying debt to many business owners.

“Too much debt, and it begins to drive business decisions that are usually short term in nature and negative for creating long term growth and value,” he says.

“We see a big move to business owners wanting to reduce risk and be better positioned to act on growth opportunities when they arise. Bringing in a partner such as Direct Capital, reducing debt and providing the capital that can enable growth, is a great way of achieving that.”

With a capital pool of $425 million to invest, Direct Capital says it expects the vibrant private company market to continue its success and for the firm to play its part in helping New Zealand’s economic recovery in the years ahead.

 

APEC 2021: A look back at what could have been. (LinkedIn)

With the recent announcement that New Zealand will no longer host world leaders for APEC Leaders’ Week next year, but will instead take the Summit digital, I took a look through the news archives to see what we are going to miss out on.

When NZ hosted APEC last in 1999:

👮🏻‍♂️ NZ security guards mistook Hillary Clinton’s mother for part of the public crowd and pushed her aside – twice.

🏉 Clinton told Sir Edmund Hillary – then aged 80 – that he might be ready for a new challenge: “I hear the All Blacks may need a new fullback.”

🛍️ Suburban shopping centres were busier than ever as the public were encouraged to avoid the city centre.

📰 International media published some bizarre stories about New Zealand and our culture.

THE POWER OF APEC

As Auckland was preparing to host APEC in 1999, the news was dominated by East Timor and its recent vote in favour of independence. The aftermath of the referendum saw mass violence, killings and destruction targeted at the East Timorese.

APEC 1999 was due to be held just days later, with Indonesia present. This introduced a challenge for New Zealand: APEC has strict rules around it that govern what can and cannot be discussed – APEC is about the economy and not about foreign policy.

At the time, New Zealand Prime Minister Jenny Shipley said: “You only get leaders of economies to come if they know that their foreign policy won’t be objected to scrutiny or interfered with. But having said that, the power of APEC, where you’ve got leaders and foreign ministers together physically in a country was always potentially going to be useful.”

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Making a tough call

It was decided that an emergency meeting of foreign minister would take place in Auckland before APEC officially began. Shipley had to phone Indonesian President B.J. Habibie to let him know the plan, and said it was a difficult phone call.

“I had a number of officials in the room with me and I held the phone out at one stage where I was being yelled at. But the thing that changed was that not only Western-aligned economies within APEC but also Singapore and others in the region felt that this was something that had to be progressed.”

As Foreign Minister Don McKinnon noted, bringing leaders to one location forced them to take a position on Indonesia’s behaviour they could otherwise have simply avoided.

As a result, after lobbying from Australian Prime Minister John Howard, the United States announced it would no longer support the IMF bailout of Indonesia unless their army withdrew and allowed peacekeepers in. Within hours Indonesia changed their stance, and an Australian-led peacekeeping force left for East Timor just eight days later along with support from New Zealand troops.

THE STAR OF THE SUMMIT

US President Bill Clinton’s appearance at APEC 1999 marked just the second time a US President visited New Zealand (Lyndon BJohnson visited in 1966 and met with Prime Minister Keith Holyoake). Clinton was warmly received by the public, using his innate ability to charm the crowds during walkabouts.

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It was reported Clinton was so fascinated by Māori culture at Auckland Museum that he asked Shipley if she would arrange for the museum’s shop to open for business because he wanted to “buy it out”. With shop staff off duty for the gathering of leaders, it fell on the museum director to open the store for the President. Clinton and the United States National Security Adviser, Sandy Berger, were reputed to have spent “a lot of money” during their 25-minute unscheduled shopping spree, with Clinton sporting one of his purchases – a circular greenstone pendant – around his neck during his time in Auckland.

On another shopping trip, he took daughter Chelsea Clinton on a two-hour trip to Parnell and Queen Street where they bought a handmade clay ocarina (wind instrument), a black pottery cat, a $400 crystal vase, two $49 oil bottles and a $27 vanilla-scented candle.

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Clinton attracted thousands to the streets to catch a glimpse of him – and not just in Auckland. A crowd of 5000 came to the International Antarctic Centre in Christchurch; hundreds waited for three hours outside a lakefront Queenstown restaurant to spot the popular president.

For one of his appearances, Clinton shared the stage with Sir Edmund Hillary. He told the audience he was thrilled to share the stage with the adventurer and said he was “referred to in our family as my second-favourite Hillary.” He suggested that Sir Edmund – then aged 80 – might be ready for a new challenge: “I hear the All Blacks may need a new fullback.”

Speaking about the upcoming America’s Cup challenge, Clinton remarked: “We even let you borrow the America’s Cup from time to time. We hope to reverse our generosity shortly.”

SUPERPOWERS MEET

New Zealand’s hosting of APEC also marked the start of a thawing relationship between the US and China – with both superpowers reopening talks while in Auckland after the US bombed China’s Embassy in Belgrade.

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Another big meeting was between Clinton and Russian Prime Minister Vladimir Putin – it was the first time they had met as leaders.

In a briefing to reporters following the meeting, it was said Clinton warned Putin that corruption could “eat the heart out of Russian society.” Those comments followed reports that Russian mobsters siphoned millions of dollars out of Moscow and laundered it through the Bank of New York. It was said Putin agreed that Russia had problems and suggested a cooperative approach.

Throughout the summit, many large offices in the city centre were operating on skeleton staff, heeding pleas for the public to stay out of the city if possible. Streets and schools in Auckland, Manukau and North Shore cities were closed and many city workers were given a day off. For those that needed to come into the city centre, many travelled earlier than normal resulting in lower than usual peak traffic volumes.

This resulted in the outer suburbs of Auckland being busier than usual, while the city centre ground to a halt – impeded by presidents, protests and police.

“They should have APEC every day,” Lynnmall Deka store manager Struan Abernethy told the media – standing in the toy department and

 

surrounded by the buzz of family shoppers. “It’s the busiest Monday we’ve had for a long time!”

A FORUM FOR FREE TRADE

One of the key themes of New Zealand’s 1999 year of hosting was lifting the support from the public for free trade – although the success of this was limited.

US Trade Representative Charlene Barshefsky outlined the problem with a warning that public opposition was the greatest threat to the world’s multilateral trading system.

“Unless that public support is regenerated, I think the World Trade Organisation is going to face tough sledding in the years ahead,” she said.

Clinton also warned of the need to put “a human face” on the global economy.

Trade Minister Lockwood Smith said the commitment to a new global round was the meeting’s biggest achievement, but export subsidies were the single biggest trade issue for NZ. While the benefits were some years off, it was important to get the world to put the abolition of the subsidies on the agenda.

United States

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Shipley joked during the Summit that she had fed President Clinton as much lamb as possible during lunches and dinners – including Manawatu lamb loins and Canterbury lamb noisettes. “I’ve eaten it all,” he joked when asked about lamb tariffs.

Clinton said the United States was the “champion of free trade,” despite his decision to impose tariffs on New Zealand lamb. He said these were “appropriate” given that the recommendation from the International Trade Commission had been made under United States law.

But he said he would study the “very interesting idea” of a free trade agreement between Australia, New Zealand, Chile, Singapore and the United States.

Singapore & Chile

In bilateral conversations, New Zealand announced a free trade agreement with Singapore and a scoping study of a similar deal with Chile.

Business leaders from Chile and New Zealand also met during the APEC summit to discuss the prospect of a free trade agreement between the two countries.

One of those leaders was Carter Holt Harvey chief executive Chris Liddell (now assistant to President Trump and deputy chief of staff for policy coordination in the White House). He and other leaders cautioned at the time that business deals between New Zealand and Chile have had hiccups – including an investment dispute between Carter Holt Harvey and Chilean conglomerate Copec.

CEO SUMMIT

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250 executives attended the CEO Summit, including around 60 of New Zealand’s most eminent businesspeople. International delegates included General Motors chairman Jack Smith and Raymond Cesca – who was responsible for handling world trade for McDonald’s.

New Zealand’s delegates to the CEO Summit included just four women – Wilson & Horton corporate affairs manager Fran O’Sullivan (who was also the CEO Summit’s deputy chair), professional director Rosanne Meo, Wellington Regional Chamber of Commerce CEO Claire Johnstone and education publisher Wendy Pye.

The chair of the Summit, John Maasland, said businesspeople were keen to work closely with APEC political leaders to increase the pace of reform and make sure a gap between developed and developing countries did not widen.

Attendees called for critical trade issues to be tackled quickly, including speeding up planned moves to achieve free and open trade and investment throughout the world by 2010 for developed countries and by 2020 in developing economies. They also called for economic governance, development of greater transparency and accountability in the financial sector and a regional approach to building infrastructure in APEC economies.

The attendees recognised that APEC politicians would need a lot of courage if they were to deliver the policies that corporations want – but if that courage was not shown, then free trade would flounder, economies would contract and people would suffer.

“We are certain that the benefits to all APEC communities will become increasingly evident if these specific actions are taken speedily and forcefully,” Maasland said.

The chief executives said their near-term challenge was to make sure the things they had talked about in Auckland over the past two days were turned into some firm policies that could be delivered in the following year’s APEC meeting in Brunei.

UNEXPECTED GLOBAL HEADLINES

There was some disappointment that New Zealand didn’t get the level of promotion that it had hoped for in international media – it was the East Timor developments that dominated the headlines. But some of the international media mentions New Zealand received included:

  • The Los Angeles Times told its readers that New Zealand was “an island nation”
  • The Los Angeles Times also ran a piece on its website explaining what a hongi is – alongside a photo of Clinton greeting Sir Hugh Kawharu: “the gesture is called a hongi, a native welcoming gesture”
  • The Newsweek website mentioned plans for the leaders’ banquet: “In New Zealand, where sheep outnumber people 15 to 1, folks know how to party. Five top chefs have been dispatched across fjords and throughout the forests to find the best ingredients for a massive feast”
  • The Boston Globe reported on New Zealand security guards mistaking Clinton’s mother-in-law, Dorothy Rodham, for part of the public crowd – twice pushing her aside during the President’s shopping walkabout. “The confusion didn’t stop Clinton from going on a buying binge. At one point he stopped in a store called Out Of New Zealand and bought an ocarina, a small traditional flute made of clay.”
  • The Boston Globe also reported that New Zealand would be the first country in the world to celebrate the millennium.
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SHIPLEY OUT, CLARK IN

Following the APEC Summit, a TV3/CM Research poll saw her rise from 14 per cent to 20 per cent as preferred Prime Minister – two points ahead of then-Labour leader Helen Clark.

In the same poll, 38% said they had a better opinion of Shipley after APEC, with 8% saying they now had a worse opinion of her.

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However, the National party’s support didn’t shift significantly post-APEC. The poll saw its support rise only one percentage point to 33 per cent. Labour polled 39 per cent (compared to 40 per cent one month earlier). Support for Alliance was down one to 6 per cent, support for New Zealand First remained at 7 per cent, Act’s support lifted one to 7 per cent, support for the Greens fell from 2.6 per cent to 2.4 per cent.

The 1999 New Zealand general election was held on 27 November 1999 – two months following APEC. The National party, led by Shipley, was defeated, replaced by a coalition of Helen Clark’s Labour party and Alliance – who led New Zealand until 2008.