Investment into New Zealand

2007 saw another year of strong international investment into New Zealand. The main investors over the past 12 months have been offshore investment funds and private equity firms.

The outlook

While international indications suggest that 2008 is going to be a year of slowing economic growth and a possible recession in the US, the New Zealand economy is likely to continue to be strong. This will be led by high commodity, and in particular, high dairy prices.

The global credit squeeze is likely to have an effect on financing large transactions within New Zealand, although NZ listed companies still look relatively cheap and will continue to attract international interest.

2008 is an election year in New Zealand. This means that there is unlikely to be much regulatory change in the course of the year, though both major parties have strongly signalled that they will be bidding for votes through tax cuts.

The relative strength of kiwi dollar, due to the Reserve Bank’s high interest rates (which is driven by continuing inflationary pressure), has probably deterred some investors looking to spend US dollars.
Over the past decade or so, US companies have invested in New Zealand’s energy, telecommunications, and forestry sectors. However, as they try to deal with problems in their own domestic markets, a number of US companies have had to divest their New Zealand assets recently.

We expect that New Zealand will continue to be an attractive destination for investors from Australia as well as the Middle East and Asia – including sovereign funds seeking a safe haven from the political risks in more volatile parts of the world. We expect this to be a trend for the next year and beyond.

Australian companies and private equity funds continue to seek opportunities to invest in New Zealand assets and this is likely to continue.

Despite the best efforts of its charismatic CEO, Mark Weldon, the New Zealand Stock Exchange (NZX) continues to struggle to attract new listings. At the same time, those companies that are listed continue to be the subject of takeover bids (including Auckland International Airport and casino operator, Sky City most recently).

One bright note for the NZX is that Fonterra’s board has stated that it is looking at listing at least part of the company within the next few years. Fonterra is New Zealand’s largest company and its listing would strengthen the NZX significantly.

In the last 12 months we have seen an increase in the number of Commerce Commission investigations and prosecutions for anti-competitive behaviour. This has resulted in part from greater resources being allocated to the Commission and greater co operation between international competition regulators to deal with cross-border cartel allegations.

A number of non-bank finance companies have collapsed in the last 12 months, mainly due to tightening market conditions. These companies have provided much of the credit to the booming property sector over the past four-five years.

The combination of the international credit crunch and slowing property market means that this is likely to continue in 2008. Investors will continue to shy away from finance companies while banks are able to offer relatively high, risk-free interest rates on deposits.

Generally we expect an increase in insolvency and general recoveries work for our lawyers. The high interest rates will leave many borrowers over-stretched and the banks are likely to be less sympathetic, with the housing market slowing down, than in previous years.
New Zealand is a signatory to the Kyoto Protocol and, in the countdown to the end of the first commitment period in 2012, the government has announced the introduction of an emissions trading scheme to help reduce CO2 emissions. This will be a growth area for New Zealand lawyers as the precise rules are finalised and clients come to grips with what is required of them.
Telecom New Zealand, under the guidance of new chief executive, ex-BT executive Paul Reynolds, has been forced to undertake both structural separation and to unbundle its local loop. This is likely to see a further opening up of the market to new players and further investment from overseas.

Regardless of the outcome of the election, there will be a significant increase in infrastructure investment by the government. Depending on which party wins government, there may also be public private partnerships for some of those projects.

Clients

The major users of law services in New Zealand are likely to continue to be the banks, telecommunications providers, energy companies, infrastructure and the government, who still get an increasing amount of advice from private firms. M&A activity is likely to continue to be reasonably strong in 2008.

NZ legal market

Generally, New Zealand’s major law firms have a decreasing number of partners and this looks likely to continue. While the number of large firms has not consolidated, the rise in the number of competitive specialist boutique firms also continues and this trend looks unlikely to change in the near future.

Both of these factors contribute to New Zealand being one of the most competitive legal markets in the world.

It is also a very competitive market to maintain a high calibre of talent within the firms. In recent years there has been a steady trend of organisations increasing the numbers of lawyers in their in house teams, removing talent from firms and reducing their external legal spend. This trend has not reversed.

In addition, New Zealand lawyers are still highly sought after by London and, to a lesser extent, US firms. The call of the OE (overseas experience) is almost a rite of passage for all New Zealanders and our young lawyers enjoy significant career and financial advantages by working overseas for a period of their career.

Mark Weenink is managing partner of Minter Ellison Rudd Watts