12 June 2006
Private equity investors are among a new wave of factors accelerating the economic integration of New Zealand (NZ) and Australia. Arguably more than ever before, the landscape is dotted with examples of a merging trans-Tasman marketplace. Australian-based private equity funds are buying up NZ businesses and increasingly corporate decisions for both markets are being made in Australia. It has been reported that at least one major NZ-listed company is considering a shift of its head office across the Tasman Sea.
The concept of a merged market is not new. The process began in the early 1980s when a landmark Closer Economic Relations Trade Agreement was signed between the two nations to free up trade, and during the past decade it has gained speed and traction, aided by a number of factors, including the growing harmonisation of business regulation in areas such as banking.
More recent talk of a 'downunder' euro was archly dismissed by NZ Prime Minister Helen Clark, who suggested a better start would be if the Australian Customs Service reciprocated the actions of its Kiwi counterpart by having a shared entry lane for both nations' residents.
The rise of Australian private equity
Fuelled by an Australian government decision in the early 1990s to introduce compulsory superannuation for all residents, Australian-based private equity funds are flush with cash and are looking for an investment home.
In 2004, US$2.9bn (£1.55bn) in Australian private equity money was raised, but only US$800m (£427.08m) was drawn down or invested in the same year. Just less than 80 per cent of Australian superannuation funds have private equity investments. It is not surprising, then, that in the past three years top Australian private equity organisations have looked to NZ for more attractively priced assets.
In the six years before June 2005, close to NZ$665m (£223.15m) was invested by private equity organisations across 280 investments in NZ. Based on deal flow, that figure is expected to be easily exceeded by June 2007, just two years later.
The Australian private equity funds follow in the wake of large Australian corporates, which over the past decade have followed a more traditional public takeover of NZ companies.
The four major banks in NZ are now Australian-owned, as are the major insurance companies, and even the nation's newspapers. A number of key decisions in NZ corporates are being made by their parent offices in Australia, although this is not necessarily a new phenomenon - there remain some Australian corporate decisions that are, in turn, being made by US-based parent firms.
News that NZ's third-largest listed company, the NZ$4.1bn (£1.38bn) building giant Fletcher Building, is studying the merits of shifting its head office to Australia has, however, sent shockwaves through the market and added fuel to an ongoing debate about the comparative tax and regulatory regimes in both countries. The impact of such a move by itself, let alone a trend of this nature, would seriously undermine the local capital markets.
The NZ government is expected to release the outcome of a business tax review in the coming months and has also just announced that it will conduct a review of the regulatory framework under which businesses operate - measures aimed at addressing any barriers to business in a competitive local and global environment.
The New Zealand reaction
It would be tempting to paint the activity of the past couple of years as some sort of Australian economic colonisation of the NZ market, but it is not viewed that way locally and there is little hand-wringing about the Aussie private equity funds' activities.
Partially this is motivated by a sense of realism that NZ operates in a global economy and the fact that local assets are attractively priced, especially given the recent slump in the Kiwi dollar. Overseas investment is generally welcomed - that is, unless you are a US rock star trying to buy up large chunks of the scenic South Island.
Another significant factor is a cultural and social closeness that makes any anti-Australian campaign very unlikely, unless someone in Sydney decides to buy out the All Blacks.
For law firms that service major NZ corporates, the influx of Australian-based investment, especially in the private sector, is providing both opportunity and ongoing and future challenges.
Since the 1990s there has been a consolidation in the business marketplace and large locally owned corporates are not thick on the ground. A number of NZ corporates have been delisted - among the most recent being Ports of Auckland, energy group Powerco and major forest products company Carter Holt Harvey. This has reduced the level of listing and related work available in the legal marketplace.
Business owners are now often not down the road, but rather 'across the ditch', and a three-hour flight to head offices in Sydney, Melbourne or Brisbane. NZ law firms are rapidly learning how to manage client relationships from a distance.
But the major NZ law firms have not buried their heads in the sand about the changing marketplace, nor are they perusing commercial real estate in downtown Sydney. Australian investment into the local economy has, in fact, assisted local firms. Strong relationships with Australian-based private equity funds are a big part of this, and it is noticeable that these organisations typically keep many management decisions fairly localised in NZ and are happy to use quality local service providers.
While growth in the market for legal services in NZ has not been spectacular in the past four years, it has also not declined in what is accepted to be one of the most competitive markets in the world.
For the future, Australia will become an even more important and integral part of the market for NZ's major commercial law firms. The challenge for NZ firms will be to recognise that relationships with key Australian companies and referers, including law firms, must be strong for ongoing success, and that means getting on a plane and meeting them face-to-face on a regular basis.
This is not a case of NZ law firms turning their backs on their Kiwi clients. Rather, it is about ensuring that, as the market dynamics change, local law firms respond by giving Australian-based clients the same level of relationship management and service as for local clients. Australian-based clients should be seen as 'locals', and this requires an attitude change.
Given that a couple of weeks ago Australian Customs opened joint arrival lanes for both Australian and NZ citizens, that trip will now be even quicker. Expect a downunder euro to take a lot longer though.
Stephen Macliver is chief executive at Bell Gully