At the recent US Business Summit, Rocket Lab’s Peter Beck told the audience that the number one problem New Zealand entrepreneurs have is they don’t think big enough.
“Think bigger. Way, way bigger,” he urged. “If you’re starting a company, it is a hard painful thing to do. Don’t start a company with the aim of building a $100 million dollar company — build a $100 billion company and set your sights high.
“I was born at the bottom of the South Island in Invercargill, and if I can build a space company then anyone can do anything. There is no barrier.”
This view was shared by the local venture capital (VC) community at a recent panel event on venture capital, organised by the Angel Association New Zealand and NZ Private Capital. The panel said that while the differences of five years ago between the US and New Zealand VC firms are starting to coalesce, kiwi startups still need to learn aspirations from the United States.
However, some of this may be attributed to another difference the panellists identified – NZ companies tend to be much more capital efficient than US venture-backed startups.
“The US is probably looking for unicorns more,” said Movac partner David Beard, referring to startups valued by investors at more than $1 billion.
“Sometimes the decisions you have to make as a founder to be a unicorn require you to introduce significant risk to your business. In New Zealand, we are a little more balanced where we want our entrepreneurs at a fundamental level to succeed and work out what the measured risk is instead.”
The state of the economy
Given the current economic climate, operating as a VC in a bear market inevitably took centre stage at the panel discussion.
Beard explained that the nature of VC investing means that the current climate is negligible since investments, whether they were made over the past two years or will be made in the coming years, would not be realised until an initial public offering (IPO) or sale in a bull market.
“We might have a two-year hiccup, which will see a shift in mode setting from ‘growth at any cost’ to ‘growth with some efficiency around it’,” he said. “Founders and venture capital firms will need to make sure that they are making the best use of the money they have for the next couple of years — it’s about being a bit more sensible.”
A lot of big funds have been raised in recent years in the US, which has seen investors look worldwide for deal flow. Pitchbook data shows that VCs raised more money for new funds in the first quarter of 2022 than in the entirety of 2019.
But these new funds haven’t translated into more investments into startups, with VCs keeping ‘dry powder’ — uninvested capital — aside for existing portfolio companies in case they need more support than they have in the past.
Beard has started to see global funds retract. “We need to make sure we have companies we can fund in New Zealand through co-investment, and make sure the good ones get the resources and money they need over the next few years,” he said.
“Expectations of wildly growing high valuations and selling in three years might have been possible recently, but now we need to be more pragmatic.”
Punakaiki Fund’s Nadine Hill told the audience that the inflationary environment will provide fuel to help accelerate change.
“We saw in Covid how important technology solutions were for people. With inflation, it has never been more important to take costs out of business, and do business and life better,” she said. “We are not traders, we’re not trying to buy low and sell high, we are trying to build companies over the longer-term.”
GD1’s founding partner Chintaka Ranatunga shared this sentiment. While the next three years will likely see a higher failure rate among early-stage startups than in recent years, he also expects to see the creation of exciting new companies.
“This kind of environment is a great time to start something, we will see companies become stronger and have better access to talent,” he said. “Despite the doom and gloom, I am optimistic about the three-year outlook — remembering that for most of us it is a 10-year game, rather than a short-term one.”
ESG focus ever-present
An important aspect of a deep-tech VC’s role is to consider: “what is life going to be like in 2030?” — a world that might be without petrol and plastic.
To a certain extent, this means that ESG (environmental, social, governance) principles are naturally incorporated into decision-making.
GD1 continues to see significant demand from its institutional, private wealth and other investors to closely consider ESG metrics.
“We have a bunch of exclusionary criteria around sectors, along with ESG and diversity clauses in our term sheets,” said Ranatunga, with GD1 actively working on requirements for companies to report back.
Pacific Channel’s Kieran Jina said that investors in his deep-tech VC ultimately want to invest in things that will make them feel good.
“If you have a company that adheres to ESG principles, it is more likely to meet that requirement.”
But he acknowledges the increasing concerns of greenwashing and accurate reporting of ESG metrics.
“Measuring is always going to be problematic, and it can become very subjective,” he said.
“The harder aspect has been in the governance area.
“A lot of companies that come to us haven’t necessarily thought about that — if we applied a negative filter to our decision-making then there wouldn’t be a pipeline left.”
https://www.timmccready.nz/wp-content/uploads/2022/07/2022-06-30-Capital-Markets_018.png813740tim.mccreadyhttps://www.timmccready.nz/wp-content/uploads/2020/03/TimMcCready_banner.pngtim.mccready2022-06-30 12:00:192022-07-04 12:03:31Surviving the Bears: Optimism in venture capital (NZ Herald)
Just when there was hope emerging that the Covid-19 pandemic was being brought under control and turning a corner, Russia’s invasion of Ukraine has reignited uncertainty and had a wide-ranging impact on the global economy and capital markets.
On top of that, many of the world’s central bankers — including New Zealand’s Reserve Bank — have now turned hawkish, unleashing an aggressive tightening of monetary policy.
This is happening against a backdrop of megatrends that continue to shape the financial services sector.
Companies face myriad challenges, but they also have an opportunity to redefine themselves and remain competitive by embracing ESG principles, prioritising digital innovation, and investing in their people to ensure they retain and grow their capability.
Here is a closer look at some of the most significant issues expected to shape the capital markets over the next year:
1. Central banks tighten
Central banks are having to carefully navigate monetary policy intervention, finding a balance between preventing high inflation becoming entrenched versus slowing the economy and causing pain for those already feeling the crunch from the rising cost of living.
We are acutely aware of New Zealand’s interest rate hikes. The Reserve Bank has steadily raised interest rates to reach a six-year high of 2 per cent and has projected it may need to rise to 3.8 per cent by mid-2023.
This is happening around the world. The UK’s Bank of England has raised interest rates in a fifth straight meeting, sending a strong signal that bigger moves will follow if needed to fight resurgent inflation. Earlier this month, Switzerland’s central bank raised interest rates for the first time in 15 years – also hinting that it was ready to hike the rate further.
Inflation in the United States has hit a 40-year high of 8.6 per cent and the Federal Reserve has responded with the sharpest raise of interest rates since 1994. When that news hit earlier this month, the tech-heavy Nasdaq with its speculative stocks fell over 3.5 per cent.
The S&P 500 index fell more than 20 per cent off its peak and officially hit bear market territory, with JP Morgan analysts suggesting the result now implies “an 85 per cent chance of a US recession.”
Here, analysts expect a short and shallow recession, but there are fears that poor results in global economies may make it worse than anticipated. US Federal Reserve chair, Jerome Powell said “no one knows with any certainty where the economy will be a year or more from now,” making it likely that investor concerns will continue for some time to come.
2. Geopolitical shockwaves test capital markets
Some four months into Russia’s invasion of Ukraine, the extended conflict has resulted in rampant increases in the cost of commodities and energy, ongoing supply chain disruptions, and a tightening of financial conditions.
Soaring inflation around the world and lower global growth are some of the most noticeable economic consequences of the ongoing unrest. Deglobalisation, labour market challenges and housing market factors are expected to continue to contribute to inflationary pressures, while slowing growth in major economies has raised the spectre of stagflation — the combination of low growth and high inflation — becoming a real possibility.
Closer to home, China’s zero-Covid policy and the risk of further outbreaks and lockdowns continue to concern markets about longer-than-expected disruptions to global supply chains and further inflationary pressures. The zero-Covid policy, which tolerates slower economic growth in favour of the elimination of the virus, shows no sign of abating ahead of the 20th National Congress of the Chinese Communist Party later this year in which President Xi Jinping is expected to secure an unprecedented third term.
There are signs geopolitical ramifications could reverberate across capital markets for some time and will test the resilience of the financial system.
Chief economist at the International Monetary Fund, Pierre-Olivier Gourinchas, warns that the world is at risk of fragmenting into “distinct economic blocs with different ideologies, political systems, technology standards, cross-border payment and trade systems, and reserve currencies”.
3. ESG is tested
Investing within an ESG framework — where environmental, social and governance factors are considered — has become the fastest-growing segment of the asset management industry. However, the lack of standardisation in reporting has brought with it criticism that non-financial metrics might be misrepresented, making ESG investments hard to define and almost impossible to compare data across firms. Cracks in ESG investing are beginning to appear, with an increase in scrutiny by regulators and investors looking more closely at the attributes of their investments.
The US Securities and Exchange Commission is investigating potentially dubious claims made by Goldman Sachs’ asset-management arm about its ESG funds; earlier this month German police raided the offices of asset manager DWS and its majority owner Deutsche Bank as part of a probe into allegations of greenwashing.
The rise of “greenwashing” is resulting in the introduction and tightening of reporting standards which companies will need to grapple with.
In March, the US Securities and Exchange Commission proposed enhanced disclosure requirements for advisors and funds that market themselves as having an ESG focus. This would require disclosure in reporting including information about climate-related risks that are reasonably likely to have a material impact on their business as well as detail on greenhouse gas emissions.
The European Union is introducing its own Corporate Sustainability Reporting Directive, which comes into effect in 2023. This mandates a broader set of disclosure standards compared to the US proposal that sweeps across the environmental, social and governance domains.
New Zealand’s mandatory climate-related disclosures that will apply to around 200 large publicly listed companies, insurers, banks, non-bank deposit takers and investment managers will commence in 2023 — a formal exposure draft of the complete climate standard is due out later this year.
The rapid rise of tech-heavy ESG funds occurred during the bull market run. With that now over, historically good returns will be tested in the coming year and there are already signs that demand for the asset class is cooling.
Financial services firm Morningstar reports that flows into ESG funds globally have slumped 36 per cent in the first quarter. Bloomberg Intelligence has reported a $2 billion outflow from “do-good” ESG-labelled exchange-traded equity funds by investors in May this year, following three years of inflows.
4. Global talent shortage an ongoing headache
Talent shortages are hitting all industries but are being keenly felt in the capital markets.
To remain competitive throughout the “Great Resignation”, companies need to rethink what they can offer employees to attract and retain them.
With worldwide competition for skills, employees have the upper hand in negotiations for the first time in a long time.
The 2022-23 Hays Salary Guide suggests the top factors driving turnover in the accountancy and finance industry across Australia and New Zealand are uncompetitive salaries, a lack of promotion opportunities, and poor management style or workplace culture.
But employees are also increasingly looking to work for companies they can be proud of.
Businesses have an opportunity to stand out in if they can clearly articulate their purpose and provide meaningful jobs that go beyond commercial outcomes — including ESG principles.
Firms are also under pressure to redefine the workplace and how work is done. Successful firms in the capital markets will balance the desire to attract employees back into the office with the expectation from staff for organisations to offer hybrid or flexible working.
Making this work long-term for teams that have varying wants and needs, while maintaining service delivery and productivity, will be critical.
5. Ongoing disruption of digital technologies
Even before the pandemic, digital technologies were reshaping the capital markets sector.
But the Covid-19 pandemic and subsequent lockdowns suddenly — and permanently — altered how companies provide services and interact with their customers.
There is increasing pressure on banks and finance firms to remain competitive, with fintech companies and big tech moving into what was core banking business.
Apple recently announced its “Apple Pay Later” service as the latest addition to its growing financial services suite.
This will allow its United States customers to take out short-term loans directly with the tech giant, sidelining its traditional banking partners.
To remain competitive, businesses are bolstering their teams with specialised capabilities in technology — including data analytics and cyber-security, artificial intelligence (AI) and cloud — all areas that are considerably impacted by the global talent shortage.
Technology research firm Gartner forecasts that IT spending by banking and financial services firms will grow by 6.1 per cent globally this year as they aim to adopt technologies that will make the lives easier of consumers and businesses.
This disruption may well be good news for New Zealand’s tech export sector.
The Technology Investment Network’s (TIN) Fintech Insights Report highlights that fintech’s five-year compound annual revenue growth rate has reached 32 per cent.
In 2021, revenue for the sector rose 24.4 per cent, with employment also lifting 14.2 per cent.
“The continuing online growth of online commerce, accelerated by the Covid pandemic, will only serve to strengthen the importance of the New Zealand fintech sector as more tech companies and investors seek opportunities,” says TIN’s managing director Greg Shanahan.
In a world of ongoing uncertainty, the sector is expected to be an important contributor to the New Zealand economy in the years ahead.
https://www.timmccready.nz/wp-content/uploads/2022/07/2022-06-30-Capital-Markets_005.png1116753tim.mccreadyhttps://www.timmccready.nz/wp-content/uploads/2020/03/TimMcCready_banner.pngtim.mccready2022-06-30 11:59:582022-07-04 12:03:49Surviving the Bears: Five big capital markets trends to watch (NZ Herald)